House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)

Notes on Clauses

INCOME TAX BILL 1974

Introductory Note.

As this Bill, in large measure, re-enacts provisions found year-by-year in legislation declaring the rates of income tax for the financial year, the following notes are restricted to the main provisions of the Bill that differ in practical effect from the legislation that declared the rates of tax for the 1973-74 financial year.

Clause 6: Rates of tax payable by persons other than companies

This clause declares the ordinary rates of tax payable by persons other than companies, i.e., by individuals and by trustees, for the 1974-75 financial year. The rates of tax are set out in the schedules to the Bill.

The general rates of tax, applicable to most individuals, are declared by sub-clause (1) and are set out in Schedule 1 to the Bill. On all but relatively high taxable incomes the tax payable under a restructured rate scale will be less than that payable for 1973-74. The maximum marginal rate of tax will be 67.0 per cent and will apply to the part of a taxable income that exceeds $40,000. This compares with a maximum marginal rate of 66.7 per cent applicable in 1973-74 to taxable income in excess of the same amount.

Sub-clauses (2), (3) and (4) and the associated Schedules 2, 3 and 4 to the Bill fully reflect the new rates of tax in the cases to which each Schedule applies.

Primary producers to whom the averaging provisions of the Assessment Act apply are liable for tax at the rates declared by sub-clause (2), as set out in Schedule 2. The effect of Schedule (2) is to tax the first $16,000 of taxable income at the lesser of the average rate based on the general rates applicable to the person's average income and the average of the general rates applicable to a taxable income of $16,000. In consequence of the proposed changes in the general rates of tax, Schedule 2 differs from its 1973-74 counterpart in two respects. The average rate of tax applicable to an income of $16,000 has been reduced slightly below its 1973-74 level of 37.729375 cents in the dollar and the tax at general rates on a taxable income of $16,000 has been reduced from its 1973-74 level of $6,036.70.

Sub-clause (3) declares the rate of tax applicable to a taxpayer deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors and inventors) of the Assessment Act. This is set out in Schedule 3 to the Bill. As Schedule 3 applies by reference to the rates in Schedule 1, the reductions in the general rates will apply automatically in these cases.

Sub-clause (4) declares that the rate of tax payable by a trustee in pursuance of section 98 (broadly, income to which a minor beneficiary is presently entitled) or section 99 (income to which no beneficiary is presently entitled) of the Assessment Act is to be determined by Schedule 4. Although this Schedule has not been varied from its 1973-74 counterpart, the proposed alterations to the general rates of tax will flow through to these cases, since Schedule 4 specifies that the rates of tax fixed by Schedules 1, 2 and 3 are applicable in assessments under section 98 and section 99.

Sub-clause (5), together with Schedule 5, declares that the rate of tax to be payable by a trustee on the investment income of the 1974-75 income year of a superannuation fund that does not invest a sufficient proportion of its assets in public securities will be 45 per centum, in lieu of 47 1/2 per cent.

The ordinary tax payable where sub-clauses (6) to (9) apply will remain unchanged from the 1973-74 year.

Sub-clause (10) specifies that for the purposes of clause 6 the terms "tax" and "further tax" do not include the surcharge in respect of property income to be imposed in accordance with clause 8. This will ensure that tax payable in accordance with sub-clauses (1) to (9) will be determined exclusively of any liability for the property income surcharge.

Clause 7: Limitation of tax payable on certain incomes

Clause 7 imposes a limit on the amount of tax payable by a person, other than a company, on incomes marginally above the amounts set out in paragraphs (a) and (b) of sub-clause 5(3) as the amounts of income up to which no tax will be payable. The purpose of this clause is to cushion the movement from complete exemption into tax at ordinary rates. In 1973-74, tax at ordinary rates was limited in the cases of individuals, and of trustees liable to tax under section 98 of the Assessment Act, to two-thirds of the amount by which the income exceeded $1,040, tax at general rates being reached at an income above $1,120. The tax at ordinary rates payable by a trustee under section 99 was for 1973-74 limited to nine-twentieths of the amount by which the income exceeded $416, with tax at general rates being reached at an income above $426. In line with the changes in general rates of tax, the "shading-in" arrangements for 1974-75 are being varied.

Sub-clause (1) refers to an individual and provides that where the taxable income does not exceed $1,061 (the new upper limit of the "shading-in" range) the tax payable under Schedules 1, 2 and 3 to the Bill is limited to 66 per cent of the amount by which the taxable income exceeds $1,040.

Sub-clause (2) refers to net income of a trust estate that is assessable to the trustee under section 98 of the Assessment Act, i.e., where the beneficiary presently entitled to the income is under a legal disability. Where the net income does not exceed $1,061 the tax payable by reference to Schedule 4 to the Bill will be limited to 66 per cent of the net income in excess of $1,040.

Sub-clause (3) refers to net income of a trust estate to which no beneficiary is entitled that is assessable to the trustee under section 99 of the Assessment Act. If the net income does not exceed $425 the tax payable will be limited to 45 per cent (i.e., nine-twentieths) of the excess of that income over $416.

Clause 8: Surcharge of tax in respect of income from property

This clause will impose a surcharge of tax for the 1974- 75 financial year on certain individuals and trustees whose taxable income includes income from property.

Sub-clause (1) specifies that an individual whose taxable income exceeds $5,000 is to pay a surcharge in respect of the part of the taxable income that is derived from income from property. The rates of surcharge are set out in Schedule 6. Similarly, a trustee (other than a trustee of a superannuation fund) who is liable to be assessed under section 98 of the Assessment Act (broadly, in respect of income to which a minor beneficiary is presently entitled) or under section 99 or 99A (in respect of income to which no beneficiary is presently entitled) will be liable to surcharge in respect of property income included in the net income that is the subject of the particular assessment, if that net income exceeds $5000. The amount of property income included in the taxable income or net income is referred to as the "property income component".

Rules governing whether income is income from property are set out in the definitions in section 6 of the Assessment Act of "income from personal exertion" and "income from property". Apart from a change proposed in clause 3 of the Assessment Bill, these definitions are not being varied from the form in which they existed for purposes of a further tax on property income that applied until 1952-53. Under the definitions, income that is not "income from personal exertion" is to be treated as income from property.

The main categories of property income are -

•

dividends;

•

rent;

•

interest, except where the taxpayer's principal business consists of the lending of money, or where the interest is received in respect of a debt due to the taxpayer for goods supplied or services rendered in the course of business;

•

royalties that do not form part of the proceeds of a business.

Profits arising from the sale by the taxpayer of any property, whether or not acquired by him for the purpose of profit-making by sale, will not count as income from property.

Section 50 of the Assessment Act has rules for determining the amount of income from property that is to be regarded as included in taxable income. The amount of property income included in taxable income will be the amount remaining after deducting from assessable income from property all allowable deductions or parts of deductions that relate directly to that income, and any amount by which other allowable deductions exceed assessable income from personal exertion.

Except for taxable incomes (or, in the case of trusts, net incomes) in the range $5,001 to $5,499 (for which there is to be a sliding rate) the rate of surcharge prescribed by Schedule 6 is 10 per cent of the "basic tax", not 10 per cent of the amount of property income. For taxable incomes (or net incomes) in this range the rate of surcharge is to be ascertained by multiplying the number of dollars of taxable income (or net income) in excess of $5,000 by 0.02 per cent. For example, if a person has taxable income of $5,100 the surcharge will be 2 per cent ((5,100 - 5,000) * 0.02).

The "basic tax" on the property income component against which the rate of surcharge is to be applied by virtue of sub-clause (1) is defined in sub-clause (2). In broad terms it is the amount of tax applicable, at average rates, to the property income included in the taxable income or net income, as the case may be. The "basic tax" will be the same proportion of tax on total taxable income (after allowance of rebates such as the aged persons rebate (clause 9) and the low income family rebate (clause 35 of the Assessment Bill)) as income from property included in taxable income bears to total taxable income.

Clause 9: Rebate of tax payable by aged persons and certain pensioners

This clause authorises the allowance from 1974-75 of a rebate of tax of up to $130 to people of age pension age (i.e., men of 65 or more and women of 60 or more) who are residents of Australia. The rebate will also be allowed to a woman of less than 60 if she is a resident of Australia and the wife of a resident who is 65 or more. A woman in receipt of a wife's pension because she is regarded for the purposes of pension legislation as the wife of a man of 65 or more will also be entitled to the rebate.

For the 1973-74 financial year the maximum rebate was $156, reducing by 25 cents for each $1 of taxable income above $3,224. People who met the tests of eligibility for the rebate for part only of the year were entitled to a proportionate amount of rebate. The practical effect of the rebate was to free from tax people who qualified for the rebate for the whole of 1973-74 if their taxable income was $1,921 or less.

Sub-clause (3) is designed to give effect to the proposal to reduce the rebate from $156 to $130 and specifies that, in the case of a person who qualifies for the rebate for the whole of the income year, and whose taxable income for the year does not exceed $3,224, the amount of the rebate will be $130. Where the taxable income exceeds $3,224 the basic rebate is to be reduced by 25 cents for each $1 by which the taxable income exceeds $3,224, the rebate thus reducing to nil, and normal rates of tax becoming payable, at a taxable income of $3,744. In conjunction with the rates of tax proposed for 1974-75 the rebate of $130, where available for the whole of the year, will result in freedom from tax for an aged person with a taxable income of $2,358 or less.

Clause 10: Rates of tax payable by companies

Sub-clause (1) will declare the rates of tax payable by companies for the 1974-75 financial year, in respect of income of the 1973-74 income year, to be as set out in Schedule 7.

The general rate of company tax payable by public companies is to be reduced from the 47.5 per cent rate that applied for the last financial year, to 45 per cent. The general rate of 45 per cent is also to apply to the taxable income of private companies, which will therefore pay tax at the same rate as for the 1973-74 financial year.

Co-operative companies and non-profit companies (other than friendly society dispensaries), that paid tax for the 1973-74 financial year at rates of 42.5 per cent on the first $10,000 of taxable income and 47.5 per cent on the balance will, under the Bill, be taxed at rates of 42.5 per cent on the first $10,000 of taxable income and 45 per cent on the balance.

INCOME TAX ASSESSMENT BILL (NO. 2) 1974

The main features of this Bill have been referred to in the introductory pages of this memorandum. The following notes relate to the individual clauses of the Bill.

Clause 1: Short title and citation.

This clause formally provides for the short title and citation of the amending Act and the Principal Act, as amended.

Clause 2: Commencement.

Section 5(1A) of the Acts Interpretation Act 1901-1973 provides that, unless the contrary intention appears, every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent.

This clause provides that the amending Act will come into operation on the day on which it receives the Royal Assent, thus facilitating the early application of provisions of the Act from dates set out in its various clauses.

Clause 3: Interpretation.

This clause proposes to effect three amendments of a technical nature to sub-section 6(1) of the Principal Act which contains definitions of words and phrases used in that Act.

Paragraph (a) of sub-clause (1) of clause 3 proposes an amendment to the definition of "apportionable deductions" in sub-section 6(1). This is consequential upon the proposed insertion in the Principal Act of a new subdivision - Subdivision C of Division 3 of Part III - containing new provisions relating to the proposed income tax deduction for housing loan interest payments.

Stated broadly, the term "apportionable deductions" means deductions of a concessional nature which do not directly relate to the production of assessable income. The definition enables concessional deductions of this kind to be apportioned on a pro-rata basis against various classes of income for purposes of certain provisions of the Principal Act.

By amending the definition of "apportionable deductions" to include a reference to Subdivision C of Division 3 of Part III, paragraph (a) will ensure that deductions allowed or allowable in respect of housing loan interest payments under the new Subdivision are apportionable on the same basis as other concessional deductions where apportionment is necessary under the relevant provisions of the Principal Act.

Paragraph (b) of sub-clause (1) of clause 3 proposes to amend the definition of "concessional deductions" in sub-section 6(1) of the Principal Act to include a reference to proposed Subdivision C of Division 3 of Part III so that the proposed deductions for housing loan interest payments will, for purposes of the Principal Act, be treated as concessional deductions. An effect of this amendment is that the allowance of deductions for housing loan interest will, as with other concessional deductions, not give rise to a loss to be carried forward for deduction against income of a subsequent year under the loss provisions of the income tax law.

Paragraph (c) proposes that the definition of "income from personal exertion" or "income derived from personal exertion" be amended to include income assessable under section 26AAA of the Principal Act. The effect of this amendment will be that the surcharge of tax on property income (clause 8 of Income Tax Bill 1974) will not apply to income assessable under section 26AAA. Shortly stated, section 26AAA brings to account as assessable income any profits arising from the sale by the taxpayer of property or an interest in property within 12 months after the date of purchase.

By sub-clause (2) of clause 3, the amendments proposed by sub-clause (1) will apply to assessments in respect of income of the 1974-75 and subsequent income years.

Clause 4: Continental shelf to be treated as part of Australia for certain purposes.

Introductory Note

Section 6AA of the Principal Act applies so that exploration or exploitation of oil or natural gas and associated activities carried out on the continental shelf (referred to as the "adjacent areas") of Australia are treated for income tax purposes as though the activities were carried out on the mainland. This clause proposes to extend the scope of section 6AA so that exploration and mining activities for minerals other than petroleum and associated activities conducted off-shore on the continental shelf will also be regarded for income tax purposes as being conducted in Australia.

Under the present income tax law it is a general rule that residents of Australia are subject to Australian tax on income from all sources, both inside and outside Australia. On the other hand, non-residents are subject to Australian tax only on income that has a source in Australia.

Section 6AA at present operates to make it clear that -

•

Australia has the right to tax income derived from, or in connexion with, petroleum exploration or mining activities on the continental shelf when the income is derived by a person who is not a resident of Australia for income tax purposes; and

•

both resident and non-resident taxpayers are entitled to the same income tax deductions, including the special deductions available for capital expenditure incurred in petroleum exploration and mining, as they would be if their operations were carried out on the Australian mainland.

For this purpose, the off-shore "adjacent areas" as specified in the Petroleum (Submerged Lands) Act 1967- 73, other than areas adjacent to Papua New Guinea, are treated as a part of Australia.

Sections 6 and 11 of the Seas and Submerged Lands Act 1973 assert Australia's sovereignty over the territorial sea of Australia and, for the purpose of exploring it and exploiting its natural resources, over the continental shelf. Consistent with that legislation, it is now proposed to extend the operation of section 6AA of the Principal Act to make it clear that the continental shelf is to be regarded as part of Australia for the purpose of applying the income tax law in relation to income derived and expenditure incurred in carrying on exploration or mining and associated activities for other minerals as well as petroleum.

The expanded definition of Australia will apply to income derived from general mining and associated activities in the adjacent areas but not so as to include as assessable income any income derived before 18 September 1974 that, but for this amendment, would not have been included in assessable income. It will also apply to past and future expenditures incurred in general mining or exploration in the adjacent areas. For the 1974-75 income year and subsequent years, enterprises obtaining general minerals from the continental shelf will be eligible for the special deductions provided for related expenditure on the same basis as if the expenditure had been incurred on mainland operations.

Notes on the specific amendments to section 6AA follow.

Paragraph (a) of the clause proposes to amend paragraph (1)(a) of section 6AA to substitute the word "minerals" for the word "petroleum". This will result in the section having the intended wider application to both petroleum (including oil and natural gas) and other minerals by virtue of the definition of "minerals" contained in section 6 of the Principal Act, under which the use of the expression "minerals" in the Act is to be taken as including "petroleum". The latter term is defined in section 6 to cover both oil and natural gas.

Sub-section 6AA(1), as amended, will provide that, for all purposes of the income tax law related directly or indirectly to the exploration for, and the exploitation of, petroleum or other minerals, or associated activities, the adjacent areas other than the areas adjacent to Papua New Guinea are to be treated as if they are, and have always been, a part of Australia.

The term, "adjacent area", is defined in sub-section (4) of the section. Broadly, it is a delineated area of territorial and continental shelf waters specified in the Second Schedule to the Petroleum (Submerged Lands) Act 1967-1973 as being adjacent to a particular State or Territory.

Income derived from general mining in an adjacent area of Australia will, therefore, be taxed on the same basis as if it were derived from operations carried out on the mainland. Income earned from any activities associated with mineral exploration or mining in an adjacent area of Australia will also be taxed on that basis. This would include, for example, income earned under a contract to drill for minerals in an adjacent area, or shipping freights for the carriage of ore mined in an adjacent area, etc. Dividends paid out of profits earned from mining in an adjacent area, or from activities associated with exploration or mining in an adjacent area, will also be subjected to Australian tax on the same basis as dividends paid out of profits earned from mainland operations. This is already the situation in relation to dividends from petroleum profits.

Areas adjacent to Papua New Guinea will not be treated as part of Australia. Accordingly, the taxing rights of Papua New Guinea in respect of income earned from activities associated with exploration or mining on its continental shelf will not be disturbed by the amendments proposed.

Although it is provided in sub-section (1) that an adjacent area is to be treated as if it has always been part of Australia, this is modified by proposed sub-section (3A) in relation to any income from general mining earned before the introduction of the Bill into Parliament - see notes on paragraph (b) of clause 3. The retrospective operation of the provision will, therefore, have a practical effect only in respect of expenditures.

Special deductions are authorised by the income tax law for capital expenditure incurred in exploring for, or mining, minerals in Australia or Papua New Guinea. It is proposed that these deductions will be available in the 1974-75 income year and subsequent years for both past and future expenditures incurred in mineral exploration or in carrying on mining operations in the adjacent areas of Australia or Papua New Guinea.

Paragraph (b) of the clause proposes the insertion of a new sub-section (3A) into section 6AA which will modify the operation of sub-section (1) in relation to any income derived from activities associated with exploration or mining operations (other than in relation to petroleum) on the continental shelf before 18 September 1974 - the date following that on which the proposed amendments to section 6AA were announced in the 1974-75 Budget Speech.

As already explained, sub-section (1) will require that, for income tax purposes generally, adjacent areas of Australia are to be treated as if they had at all times been part of this country. Sub-section (3A) specifically provides, however, that the section is not to operate so as to include in the assessable income of a person any income derived before 18 September 1974 that would not otherwise have been included.

Clause 5: Repeal of section 23A.

This clause proposes the repeal of section 23A of the Principal Act.

Section 23A exempts from tax 20 per cent of the net income derived from mining prescribed metals or minerals in Australia or Papua New Guinea. The prescribed metals and minerals for the purpose of section 23A are specified in Income Tax Regulation 4AA. They are -

Asbestos

Bauxite

Chromite

Emery

Fluorspar

Graphite

Ilmenite

Kyanite

Magnesite

Manganese Oxides

Mica

Monazite

Pyrite

Quartz Crystals (piezo-electric quality)

Radio-active Ores

Rutile

Sillimanite

Vermiculite

Zircon

Ores of

Antimony

Arsenic

Beryllium

Bismuth

Cobalt

Columbium

Copper

Lithium

Mercury

Molybdenum

Nickel

Osmiridium

Platinum

Selenium

Strontium

Tantalum

Tellurium

Tin

Tungsten

Vanadium

The repeal of section 23A effected by clause 5 will apply for the income year 1974-75 and subsequent years.

Clause 6: Exemption of interest received by credit unions.

This clause proposes to insert a new section - section 23G - in the Principal Act to give effect to the proposal to exempt credit unions from income tax on interest derived from loans to members.

Sub-clause (1) of clause 6 will insert in the Principal Act the proposed new section - section 23G.

Sub-section (1) of proposed section 23G will define a credit union for the purposes of the section.

Under paragraph (a) of sub-section (1) the term "credit union" will include a company registered as a credit union or credit society under a State or Territory law relating to credit unions or credit societies.

Under paragraph (b) the term will include a company that is registered under a State or Territory law relating to co-operative, industrial or provident societies and has as its principal object, or carries on as its principal business, the raising of moneys from its members and the making of loans out of those moneys to them. The need for paragraph (b) arises from the fact that some States do not have legislation which relates specifically to credit unions.

A company that might otherwise meet one of the tests specified in sub-section (1) will not, however, be a credit union for the purposes of the section if, irrespective of its name, it is a body of a kind commonly known as a building society. The need for this restriction arises from the possibility that a company registered as a credit union or credit society under a relevant law might subsequently limit its activities to those of a kind normally carried on by building societies.

Sub-section (2) is the operative provision of proposed section 23G. It will exempt interest received by a credit union on loans to members (other than companies) in any year of income in relation to which it is an approved credit union i.e. one that, in the year of income, satisfies the definition in sub section (1) and meets the tests specified in sub-section (3).

The proposed exemption will not extend to rent of premises or to income from "outside" investments e.g. interest on deposits with a bank, building society or association of credit unions or dividends or interest on marketable securities. Also, because a credit union as defined is itself a company, an association whose membership consists solely of credit unions or a federation of such associations will not derive any benefit from the proposed exemption.

Sub-section (3) specifies the conditions that are to be met to the satisfaction of the Commissioner if a company that is a credit union as defined in sub-section (1) is to be regarded as an approved credit union and entitled to the exemption provided by sub-section (2).

These conditions are designed to ensure that the proposed exemption will be available only where a credit union that satisfies the definition in sub-section (1) is conducted in broadly the same manner as the general body of companies comprising the credit union movement. The purpose of the sub-section is to guard against bodies being set up in the guise of credit unions for tax avoidance purposes.

Under paragraph (a) of sub-section (3), the first matter on which the Commissioner is to be satisfied is that, during the year of income, the credit union did not enter into any transactions of a kind not ordinarily entered into by a body covered by paragraph (a) of the definition of credit union in sub-section (1), i.e. a credit union registered under a State or Territory law relating specifically to these bodies.

In the application of this paragraph the Commissioner will have regard both to the range of transactions entered into by the credit union and, pursuant to sub-section (4), to the manner in which those transactions are executed.

The Commissioner will, by reason of sub-section (4), be empowered to deny a credit union approval for the purposes of the section where, although a transaction entered into is one of a kind that would ordinarily be within the scope of a credit union's activities, there are features associated with the transaction which stamp it as one that would not have been entered into by the general body of credit unions registered under State or Territory laws relating specifically to credit unions or credit societies.

Paragraph (b) of sub-section (3) specifies the second matter in relation to which the Commissioner is to be satisfied as a condition of approval of a credit union for the purposes of the exemption under sub-section (2). This is that, having regard to the number and value of transactions entered into during the year of income, neither its profit nor the amount of that profit transferred to reserve is excessive by comparison with other credit unions for that year.

Sub-section (4) will specify the matters that the Commissioner may take into account in determining for the purposes of paragraph (a) of sub-section (3) whether a transaction entered into by a credit union during a year of income was of a kind not ordinarily entered into by a credit union or credit society registered under a State or Territory law relating specifically to these bodies.

Under paragraph (a) of sub-section (4) the Commissioner may have regard to the circumstances in which, and the terms and conditions under which, the credit union obtained funds, made investments and lent moneys to members or other persons during the year of income.

Under paragraph (b) of sub-section (4) the Commissioner may have regard to the nature of any connexion between the credit union or its members and those who, during the year of income lent or owed money to the credit union. He may also have regard to the nature of any connexion that during the year of income may have existed between those who lent money to the credit union and those who owed money to it.

Under paragraph (c) of sub-section (4) the Commissioner may take into account any other matters that are relevant in determining whether for the purposes of paragraph (a) of sub-section (3) a transaction entered into by a credit union during a year of income was of a kind not ordinarily entered into by the specified credit union.

Taken together sub-sections (3) and (4) are intended to ensure that the proposed exemption will benefit only credit unions that are conducted along traditional lines for the benefit of their members generally.

Sub-clause (2) of clause 6 provides that the proposed section 23G is to apply to assessments in respect of the year of income that commenced on 1 July 1973 and subsequent income years.

Clause 7: Assessable income to include net stand-by value of car made available to employee for private use.

This clause will insert in the Principal Act a new provision, section 26AAB, that will operate where, in connexion with the rendering of services as an employee or in a similar capacity, a taxpayer has available for his private use a car owned or held on lease by another person (usually, but not necessarily, the taxpayer's employer).

Section 26AAB lays down methods of calculating what is called the "stand-by value" of such a car and ensures that the assessable income of the taxpayer will include, in respect of the benefit in kind of having the car available for his private use, at least the stand-by value of the car or, if he has paid something as consideration for that benefit, the stand-by value less the amount so paid. The stand-by value of the car will be calculated without regard to any use to which the car may be put other than private use by the taxpayer.

The section will complement paragraphs (e) and (ea) of section 26. Paragraph (e) provides for the assessable income of a taxpayer to include "the value to him" of allowances, benefits, etc., associated with his employment or with services he renders. Paragraph (ea) is a similar provision relating to allowances received by members of the Defence Force.

The value to a particular employee of the benefit of having a car available for his private use is often difficult to quantify and, in many cases, employees enjoying these benefits are uncertain as to the consequences for income tax purposes as the law stands. Section 26AAB will reduce the areas of uncertainty, secure more consistency and alleviate administrative problems by fixing a scale of minimum amounts, reflecting the value when purchased of the relevant cars, for inclusion in assessable incomes. The new section will apply in relation to assessments for 1974-75 and subsequent years of income.

Sub-section (1) is the operative provision of section 26AAB. It is to apply where a car owned or held on lease by another person is available to a taxpayer during the whole or a part of a year of income for private use and the availability of the car is connected with the employment of, or services rendered by, the taxpayer. In these circumstances the sub-section will bring into assessable income the amount, if any, by which the stand-by value exceeds the amount (or the sum of any amounts) included in the assessable income under paragraphs (e) or (ea) of section 26, or paid by the taxpayer, for the benefit of having the car available for private use. If there is no such excess, section 26AAB will have no effect. The amount brought into the assessable income under sub-section (1) is referred to as the "net stand-by value", a term that is defined in sub-section (3).

The operation of the new provision is not confined to cases where the car made available is one owned or held on lease by an employer or other person to whom the taxpayer renders services otherwise than as an employee. It will also apply where, for instance, a car is owned and made available by the parent or a subsidiary of the company that employs the taxpayer or by a director of the employing company.

Sub-section (2) is a drafting measure that will facilitate the use of the term "employer" to cover any person, whether the employer of the taxpayer or not, who owns or holds on lease a car that is made available to a taxpayer in circumstances with which section 26AAB is concerned.

Sub-section (3) lays down the method of ascertaining the net stand-by value of a car (the amount required by sub-section (1) to be included in the taxpayer's assessable income) in relation to the period during which it is available to the taxpayer for private use. It provides for the stand-by value of the car determined for the period in accordance with sub-sections (4) or (5) to be taken as the starting point. The net stand-by value is then ascertained by deducting from the stand-by value, as so determined, any amounts brought into the taxpayer's assessable income under paragraphs (e) or (ea) of section 26 or paid by the taxpayer to the employer as consideration for the car being available during the period. If those amounts exceed the stand-by value there is no net stand-by value, in which case section 26AAB has no application.

Sub-section (4) sets out the basis on which the stand-by value of a car that is available to a taxpayer for private use during the whole of a year of income is to be calculated. For this purpose it distinguishes between cars according to whether they are owned by, or on lease to, the employer and also according to value.

Paragraph (a) of sub-section (4) relates to cars other than leased cars. It provides for the stand-by value of such a car having a purchase price of $6,000 or less to be an amount equal to 12 per cent of the purchase price. The stand-by value of a car having a purchase price in excess of $6,000 is to be $720 (12 per cent of $6,000) plus 24 per cent of the amount by which the purchase price exceeds $6,000.

Paragraph (b) relates to a leased car having a "base price" (defined in sub-section (14) to mean, broadly, the market price of the car at the time when it was first taken on lease) of $6,000 or less. It provides for the stand-by value of such a car to be one-third of the "lease charge" (defined in sub-section (14) to mean, broadly, a full year's rental).

Paragraph (c) relates to a leased car having a base price in excess of $6,000. It provides for the stand-by value of such a car to be the sum of -

(a)

one-third of that part of the lease charge attributable by apportionment to $6,000 of the base price; and

(b)

two-thirds of that part of the lease charge attributable to the balance of the base price.

Sub-section (5) explains how the stand-by value of a car that is available to a taxpayer for private use during a part of a year of income is to be calculated. It provides for the amount that would have been the stand-by value of the car if it had been available to the taxpayer for the whole of the year to be apportioned on a time basis to arrive at the stand-by value for the part of the year during which it was available.

Sub-section (6) contains aids to interpretation for the purposes of other provisions of section 26AAB.

Paragraph (a) of sub-section (6) explains that a reference to a car being held on lease by a person is a reference to a car being on hire to the person. It goes on to exclude a car on hire under short-term arrangements of the "drive-yourself" kind and a car held under a "hire purchase" agreement. These exclusions mean that a reference to a car being held on lease by a person is, to all intents and purposes, a reference to a car that is held under what is known commercially as a leasing agreement.

Paragraph (b) relates to cars held under the successive short-term hiring arrangements just mentioned if there is a substantial continuity of the hiring resulting from successive short-term arrangements and to cars held under hire-purchase arrangements. A car so held by a person is deemed to have been purchased by him at the time when he first took it on hire and to have been owned by him at all times that are material to the operation of section 26AAB. These deeming provisions set the stage for the stand-by values to be determined under sub-sections (4) or (5) on the basis applicable to cars other than leased cars.

Paragraph (c) is concerned with a car that is held by the person on lease but is not a "leased car" within the meaning of that term as defined in sub-section (14) because the person owned it before he took it on lease. The paragraph deems the car to have been owned by the person at all material times, thus allowing the stand-by value to be determined under sub-sections (4) or (5) on the basis applicable to cars other than leased cars.

Paragraph (d) deems a car to be available for a private use on any day on which it is applied by a taxpayer or his or her spouse to a private use or on any day on which, because the employer has approved the car being applied to a private use or has not consistently enforced a prohibition against such use, it is available to be applied to a private use. It is immaterial that, on the day concerned, the car may have also been applied by the taxpayer to a non-private use or to the use of some other person.

Paragraph (e) deems a car to be applied, or available to be applied, by a person if it is applied or is available to be applied, in accordance with the person's directions, instructions or wishes. This provision relates to the situation where a car is made available to a taxpayer together with the services of a driver or chauffeur.

Paragraph (f) makes it clear that the use by a taxpayer of a car to travel between a place of residence and a place of employment or any other place from which services are rendered is to be taken to be a private use. This general rule, however, is qualified to a limited degree by paragraph (g).

Paragraph (g), in certain circumstances, allows the use by a taxpayer of a car for the purpose just mentioned to be taken, to such extent as the Commissioner determines, to be a non-private use. This relieving provision will apply if the Commissioner is satisfied that duties of, or directly associated with, an employment or the rendering of services, are required at such times, or in such circumstances, that their efficient performance warrants a car being kept at or near a taxpayer's place of residence.

An example of a situation in which the Commissioner might be satisfied as to these matters would be one where a taxpayer who is an engineer employed by a water supply authority is required to attend to any water mains that break during the night. In such circumstances it would be accepted that, for these purposes, one of the authority's vehicles would need to be on hand at or near the taxpayer's residence.

Where the use of a car to travel between a taxpayer's home and place of work during a period determined by the Commissioner is not to be taken as a private use of the car for the purposes of section 26AAB, it will not necessarily follow that no amount is to be included in the taxpayer's assessable income under the section in respect of the days making up that period. Notwithstanding the determination, the section will operate in the normal way in relation to any such day on which the car is applied to a private use, or is available for application to a private use, other than the use for travel between the taxpayer's home and work. Moreover, the determination will not mean that, for other purposes of the Act, the use of a car for travel between a taxpayer's home and work place will not be regarded as a private use. It will mean only that section 26AAB will not apply in relation to that use. It will not prevent the value to the taxpayer of that use being assessed under paragraphs (e) or (ea) of section 26 of the Principal Act.

Paragraph (h) is an aid to the interpretation of sub-section (10) which refers to an employer maintaining a pool of cars for any purpose. The paragraph makes it clear that cars in the employer's custody or possession that are held for sale or for various business uses, even though some may not be available for private use by employees, are to be treated as cars in the pool.

Sub-section (7) of section 26AAB relates to a car that is on hire but is deemed by paragraph (b) of sub-section (6) to have been owned by the employer at all material times. As explained in the notes on that paragraph, it sets the stage for the stand-by values of such cars to be calculated under sub-section (4) or (5) on the basis applicable to cars other than leased cars. That calculation is to be made by reference to the purchase price of the relevant car. Sub-section (7) requires the Commissioner to determine the amount that, in effect, corresponds with the market value of the car in question at the time when the employer first took it on hire.

Sub-section (8) is designed to ensure that the amounts that section 26AAB will require to be included in the assessable incomes of employees in respect of cars of the same kind will not differ significantly by reason that purchasing privileges are available to one employer supplying such a car and are not available to another. Where a car made available to an employee has been purchased at a price reflecting privileges in relation to sales tax, customs duty,discounts, etc., the sub-section allows the actual purchase price to be disregarded. It requires the Commissioner to determine the amount that, in effect, would have been payable for the car in an arm's length transaction at the time when it was purchased if no such privileges had been available and deems the purchase price to be the amount so determined. The sub-section also covers situations where an employer did not pay anything to acquire the car.

Sub-section (9) is designed to ensure that the amounts that section 26AAB will require to be included in the assessable incomes of employees in respect of similar cars will not differ significantly by reason that one employer made available a car that had been purchased (which means that the stand-by value would be calculated by reference to the purchase price) and another made available a car that had been taken on lease (which means that the stand-by value would be calculated by reference to the rentals).

The sub-section provides for the stand-by value of a leased car calculated by reference to the rentals to be compared with a "notional amount". The notional amount is the amount that would have been the stand-by value of the car calculated by reference to the purchase price if the car had been purchased for an amount equal to the "base price" (in effect, the base price is the market value of the car at the time when it was first taken on lease). If the comparison reveals a difference of such degree that, in the opinion of the Commissioner, the ascertainment of the stand-by value of the car on the basis that it is a leased car would give the taxpayer such an advantage, or would result in such a disadvantage to the taxpayer, that it is not appropriate for the stand-by value to be ascertained on that basis, sub-section (9) deems the stand-by value of the car to be the notional amount.

Sub-sections (10), (11), (12) and (13) are concerned with situations where several different cars are available to an employee during any year from a pool of cars held by the employer. Employees taking cars at random from those held for sale by the dealer who employs them is an example. These provisions will allow the stand-by value of the various cars available for an employee's private use to be calculated by reference to an average purchase price of all the cars in the pool from which they are drawn or, if the taxpayer draws cars exclusively or principally from one of the two price groups that attract different treatment for the purpose of stand-by value calculations, by reference to an average purchase price of all the cars within that price group in the pool. These provisions will avoid the need for a multiplicity of calculations to determine the stand-by value of each car available to an employee in respect of the period during which it is so available.

Sub-section (10) allows a taxpayer with employer's consent, or an employer with a taxpayer's consent (both having an interest because the taxpayer's liability to tax would be affected and employers will be responsible for the calculation, or the supply of information to facilitate the calculation, of stand-by values) to ask the Commissioner to determine that the stand-by value of all or any of the cars made available to a taxpayer from the pool be ascertained by reference to an average purchase price. The request is to be furnished on or before the due date for lodgment of the taxpayer's income tax return for the relevant year of income or within such further time as the Commissioner may allow.

Sub-section (11) provides for a request made under sub-section (10) to be accompanied by a statement by the employer containing the information necessary to enable the average purchase price to be calculated.

Sub-section (12) authorises the Commissioner, if he thinks it appropriate to do so and whether or not he has been asked to do so, to determine that the stand-by value for the relevant period of a car that was available to an employee from a pool of cars owned, or held on lease by the employer, is to be ascertained by reference to an average purchase price. It provides that, where such a determination is made, the stand-by value of the car in relation to the period for which it was available to the taxpayer for private use is to be ascertained on the basis that it was owned by the employer at all material times and had a purchase price equal to the average purchase price.

Any car in the pool at the "prescribed time" (defined in sub-section (14) to be the end of the year of income or such other time as the Commissioner determines) that is held by the employer on lease is to be treated as if it had been owned by the employer and had a purchase price equal to the base price (defined in sub-section (14) to be, in effect, the market value at the time when it was first taken on lease). The provisions of sub-sections (7) and (8), which fix deemed purchase prices in specified circumstances for cars available to employees, may be applied to any car in the pool at the prescribed time.

The sub-section provides three different methods of ascertaining the average purchase price. An average is to be taken of the purchase prices of all cars in the pool at the prescribed time having a purchase price up to $6,000 if the cars applied by the employee or his spouse to a private use in the year of income were exclusively or principally within that price group. An average is to be taken of the purchase prices of all cars in the pool having a purchase price of over $6,000 if the cars applied by the employee or his spouse to a private use in the year of income were exclusively or principally within that price group. In other cases, an average is to be taken of the purchase prices of all the cars in the pool at the prescribed time.

Sub-section (13) deals with situations in which a car is made available to a person by another person who neither owns the car nor holds it on lease. A company may, for example, make a car available to the employer of an associated company or a car dealer make available to his employee a car held on bailment before it is sold. The sub-section will ensure that in such a situation the employer will be treated in the same way as if the car was owned by the employer at the relevant time.

Sub-section (14) defines the meaning of various terms used in section 26AAB.

"Base price", a term used in relation to cars held on lease and which is a factor relevant to the determination of the stand-by values of such cars, is defined to mean an amount determined by the Commissioner as being, in effect, the market value of the leased car at the time when it was first taken by the employer on lease.

"Business operations", a term used in the definition of "purchase price", is defined to include any operations or activities carried out by an employer being Australia, a State, the Administration of a Territory or a public statutory corporation.

"Car", is defined to include a station wagon, panel van or utility truck and, unless it is designed to carry loads in excess of 1 tonne, any other motor vehicle that is designed to carry at least 1 passenger.

"Employment", a term used in the operative provision of section 26AAB, sub-section (1), and in sub-section (6), is defined so that the section will apply in relation to a car made available to a person in connection with a position, occupation or activity giving rise to remuneration (e.g. a directorship) that is subject to tax instalment deductions, even though the position, occupation or activity may not, in a strict technical sense, represent employment or the rendering of services. To guard against any limitation of the scope of the section on the basis of such a technicality, "employment" has been given a wide meaning that is consistent with the extended meanings of the terms "salary or wages" and "employee" in the provisions of the Principal Act that govern the pay-as-you-earn system of collection of tax from employees.

"Lease charge", a term used in relation to cars held on lease and which is a factor relevant to the determination of the stand-by values of such cars, is defined to mean, in broad terms, the rentals payable for the first complete year in the term of the lease or, if the term is less than a year, the yearly equivalent of the rentals payable for that term.

"Leased car", is defined to mean a car that is held by the employer on lease and also, in order to avoid an unwarranted change in the stand-by value of a car that has been held by an employer for some time and then purchased by him at something less than its original market value, a car owned by an employer that was previously held on lease. To avoid an unwarranted change in the stand-by value in the reverse situation, a car that was owned by an employer before being held on lease is not to be treated as a leased car.

"Person", is defined, for the purposes of section 26AAB, to have a meaning wider than it is given for general purposes by the definition in section 6 of the Principal Act. As used in section 26AAB, the term is defined to include a company, a partnership, Australia, a State, the Administration of a Territory and a public statutory corporation.

"Prescribed time", a term used to identify the time at which the purchase prices of cars in a pool are to be averaged where the stand-by value of a car available to an employee is to be determined by reference to an average purchase price, is defined to mean the end of the year of income (of the employee) or such other time as the Commissioner determines. The determination of a time other than the end of the year of income might be warranted where, for instance, an employer maintaining a pool of cars in respect of which there is a considerable turnover (e.g. a car dealer) takes stock on a date earlier than 30 June.

"Purchase price", in relation to a car, is defined to mean the amount paid by the employer to acquire the car plus any costs to have accessories fitted, other than accessories to meet special needs of his business operations.

Clause 8: Assessable income to include value of shares acquired under scheme for the acquisition of shares by employees

This clause will insert in the Principal Act a new provision, section 26AAC, to govern the taxing of benefits associated with the acquisition of shares in companies or of rights to acquire shares where the derivation of the benefits is linked with services rendered by a person as an employee or in a similar capacity. In this respect, the new provision will displace the operation of paragraph (e) of section 26 in relation to acquisitions of shares or rights after 17 September 1974, the day on which the proposal to vary the basis of taxation of such benefits was announced, except that it will not apply to share acquisitions resulting from the exercise of options or the operation of other rights that were acquired on or before that day.

Broadly stated, the new provision will include a benefit received under an employees' share acquisition scheme, measured by reference to the amount by which the value of the shares acquired exceeds the consideration given for them, as assessable income of the year in which the shares are transferred to the employee-recipient. The effect of paragraph (e) of section 26 of the Principal Act (the operation of which is now to be displaced in relation to benefits arising in future under these schemes) is to measure the value of the benefit in the year in which the employee acquires rights under the scheme and include any value as assessable income of that year. The amount of the benefit assessable in terms of paragraph 26(e) may, in practice, turn out to be either more or less than the amount that eventually becomes available to the employee when rights to acquire shares have been exercised.

Sub-section (1) of section 26AAC defines the circumstances in which it is to be taken that a taxpayer has acquired a share in a company, or a right to acquire a share in a company, under a scheme for the acquisition of shares by employees. This is the key to the operation of sub-sections (5) to (8) - the provisions that impose the basic tax liabilities arising under the section.

Under the terms of sub-section (1), a taxpayer is to be taken to have acquired a share in a company, or to have acquired a right to acquire a share in a company, under a scheme for the acquisition of shares by employees if the share or the right was acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer. Where, as a result of the exercise or operation of a right so acquired, a taxpayer acquires a share in a company, it is to also be taken that the share was acquired under a scheme for the acquisition of shares by employees.

Sub-section (2) ensures that a right initially acquired by a taxpayer in circumstances that place it in the category of a right acquired under a scheme for the acquisition of shares by employees will remain in that category notwithstanding any disposition and re-acquisition of that right.

Sub-section (3) refers to two common forms of arrangements under which shares in companies, or rights to acquire them, are received in connexion with employment. One is the kind of scheme administered by a company itself whereby, subject to special terms and conditions, employees of the company or of another company (e.g. the parent of the employing company) may obtain shares in the company, or options or other rights to acquire shares, directly from the company. The other is the kind of scheme whereby shares in a company are issued to a trustee to be held on behalf of employees of the company or of another company, with the employees having contingent rights to have such shares as are held for their benefit transferred to them in due course. Some schemes allow relatives of employees to secure benefits.

The sub-section operates as an aid to the interpretation, in particular, of sub-section (1). It provides that a reference in section 26AAC to a share in a company, or a right to acquire a share, having been acquired by a taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative includes, but is not limited to, a reference to such a share or right having been acquired by a taxpayer in pursuance of an agreement, etc, or the terms of a trust deed relating to the kinds of schemes mentioned. Shares or rights acquired in other circumstances would, of course, be within the scope of the section where a connexion between the acquisition and employment exists.

Sub-section (4) identifies the acquisitions of shares and rights to which section 26AAC is to apply. It is to apply to rights acquired by a taxpayer after 17 September 1974 and to shares acquired after that date, other than shares so acquired as a result of the exercise or operation of a right first acquired by the taxpayer on or before that date. The taxation consequences of acquisitions of shares or rights acquired on or before 17 September 1974 in connexion with employment will continue to be determined under the terms of paragraph (e) of section 26.

Sub-sections (5) to (9) are the provisions in section 26AAC that will impose liabilities for tax. Three of them - sub-sections (6), (7) and (8),- deal with situations where a right originally acquired by a taxpayer has been disposed of. It is understood that rights granted under existing schemes, perhaps with odd exceptions, are not transferable. This general situation could well change, however, if the way were left open for the avoidance of liability by means of a disposition of a right to acquire a share rather than an exercise of the right.

Sub-section (5) will apply where a taxpayer has acquired during the year of income a share in a company "under a scheme for the acquisition of shares by employees" (see notes on sub-section (1)). It provides for the assessable income of the taxpayer to include, in that year, the value of the share at the time of acquisition less any amount paid as consideration for the share and any amount paid as consideration for a right to acquire the share. If the right had been disposed of and re-acquired by the taxpayer, any amount to be taken into account as consideration paid for the right would, by virtue of sub-section (16), be the amount, if any, paid in respect of the first acquisition.

Sub-section (6) will apply where the taxpayer, having acquired a right to take up a share, disposes of the right to an associated person who, by exercise of the right, takes up the share. In these circumstances the taxpayer is deemed to stand in the associate's place so that, for the purposes of the section, the taxpayer is treated as having acquired the share for the consideration given by the associate. An associate is defined by sub-section (14) to mean a relative or partner of, or a trustee or company associated with, the taxpayer.

Sub-section (7) will cover a parallel situation where the associate disposes of a right first acquired by the taxpayer. Again, it will regard the taxpayer as having, for the purposes of the section, received any amount accepted by the associate on disposal of the right and include that amount, less any amount paid by the taxpayer for the right, as assessable income of the taxpayer of the year in which the associate sold the right.

Sub-section (8) applies where a taxpayer sells a right to acquire a share to a person not associated with him. It includes as assessable income of the year of disposal, the sale price of the right less the amount of any consideration given for it by the taxpayer.

Sub-section (9) is designed to meet the case where, following the death of an employee who has acquired a right to take up a share, the right is exercised by the trustee of his estate. In such circumstances, the trust will be assessable on any amount that, if the taxpayer had not died and had taken up the share, would have been included in the assessable income of the taxpayer under the section.

Sub-section (10) makes it clear that no amount will be included under paragraph (e) of section 26 in the assessable income of a taxpayer who acquires a share, or a right to take up a share, under an employees' share acquisition scheme, if the transactions are within the proposed section 26AAC.

Sub-section (11) will ensure that, where a right acquired by a taxpayer is disposed of in circumstances that give rise to an assessable amount under, say, section 26AAA or 26(a) of the Principal Act, any amount to be included by virtue of proposed section 26AAC will be reduced by the amount otherwise brought to account as assessable income.

Sub-section (12) has a similar purpose and operates where a provision such as section 26AAA or 26(a) has applied following the disposal by the taxpayer or an associate of a share that has been taken up pursuant to an employees' share acquisition scheme. Broadly stated, the effect of the sub-section in a normal case will be to limit the total amount included in the assessable income of a taxpayer, by reason of the acquisition and subsequent disposal of a share, to the excess of the sale price of the share over the consideration the taxpayer gave for it and the right to acquire it.

Sub-section (13) is complementary to sub-section (9). In the event that a trustee of the estate of a deceased employee becomes assessable by virtue of sub-section (9) of this section on taking up a share and is again assessable under another provision of the law in respect of the sale of that share, the amount included in the assessable income of the trust in respect of the profit on re-sale of the share will be reduced by the amount already included in the assessable income of the trust under sub-section (9) of proposed section 26AAC.

Sub-section (14) defines the circumstances in which a person or company will, in applying the section, be regarded as an associate of a taxpayer. It provides that a reference in the section to an associate of the taxpayer is a reference to a relative or partner of the taxpayer or to a trustee of an estate where the taxpayer or any relative is capable of benefiting under the trust. The expression also includes a company that is effectively under the direction or control of the taxpayer or a relative or that is capable of being controlled by the taxpayer and associates.

Sub-section (15) has effect where a share is acquired by a taxpayer pursuant to an employees' share acquisition scheme and by reason of conditions or restrictions attached to the share or applying in relation to the payment of moneys on the share, the taxpayer has not an unfettered right to sell the share, or is liable to be divested of ownership of it. In such circumstances the share will be deemed to be acquired by the taxpayer, for the purposes of the section, when the conditions or restrictions cease to have effect or immediately before it is disposed of.

Sub-section (16) provides that the amounts to be taken into account under the section in respect of consideration given by a taxpayer for a right to acquire a share will be those amounts paid or payable as consideration for the original acquisition of the right. The cost of each acquisition following the disposal of the right is to be disregarded.

Sub-section (17) is designed to prevent the effective allowance of double deductions for the same amounts of expenditure under proposed section 26AAC and other provisions. For example, where interest due on amounts owed on a share is allowable as a deduction, that interest will not be taken into account in measuring the consideration given by a taxpayer in respect of the share for the purposes of the section.

Clause 9: Club fees and expenditure relating to leisure facilities.

Sub-clause (1) of this clause will insert in the Principal Act a new provision, section 51AB, to prohibit the allowance of income tax deductions for club fees and, in certain circumstances, for expenditure relating to boats and other leisure facilities such as holiday cottages. The new section will apply to assessments in respect of income of 1974-75 and subsequent years of income.

Sub-section (1) of section 51AB defines various terms used in the section.

"Boat" is defined to include any vessel.

"Building", as defined, will allow the new section to apply in relation to a particular part of a building where that part is used for purposes with which the section is concerned and the rest of the building is used for other purposes.

"Club" is defined so that the term will cover clubs in the social and sporting categories, whether incorporated or not.

"Excepted facility" is a definition that operates in combination with the definition of "leisure facility" to identify the kinds of property with which section 51AB is concerned. Facilities of a kind which fall within the definition of "leisure facilities" to which the section applies are excluded from the operation of the section if they qualify as "excepted facilities". Notes explaining the effect of the definition follow those relating to the definition of "leisure facility".

"Land" is defined so as to ensure that, in the context in which the term is used, it could not be construed as a reference only to unimproved land.

"Leisure facility" is defined to mean property of any of the following kinds, unless it is an "excepted facility" within the defined meaning of that term, in relation to the year of income concerned -

(a)

a boat;

(b)

land used, or held for use, for or in connexion with holidays or sport, recreation or similar leisure-time pursuits (e.g., tennis courts, bowling greens, golf courses and ski runs); or

(c)

a building or other structure used, or held for use, for or in connexion with holidays or sport, recreation or similar leisure-time pursuits (e.g., ski-lodges, fishing shacks, holiday cottages, swimming pools and amenity buildings used in connexion with tennis, bowling, golfing or swimming).

A boat, land or a building or other structure will qualify as an excepted facility if, throughout the year of income or, in terms of sub-section (6), the part of the year of income during which the taxpayer owned or had rights to use it, the boat, land, etc., was used for purposes specified in the definition of "excepted facility".

A boat will qualify as an "excepted facility" - and thus be excluded from the "leisure facility" category - if, at all relevant times, it is held by a taxpayer for sale as trading stock in the ordinary course of a business. A boat will also qualify as an "excepted facility" if, at all relevant times it is used or held for use by the taxpayer - principally for one or more of the following purposes -

(a)

the purpose of being let out on hire in the ordinary course of a business of letting boats on hire.

(b)

the purpose of transporting for reward members of the public or goods or substances in the ordinary course of a business.

(c)

any other purpose in the ordinary course of a business carried on by the taxpayer if the Commissioner of Taxation is satisfied that the use of the boat for that purpose is essential to the efficient conduct of that business.

In relation to the test referred to in sub-paragraph (c) of the preceding paragraph, a taxpayer using a work-boat principally for such purposes as commercial fishing operations or transporting employees or stores to an off-shore oil rig would have no difficulty in showing that the use of the boat for that purpose was essential to the efficient conduct of the fishing or drilling business. On the other hand, where a boat is used to provide outings for potential customers or clients of a business, or to secure publicity for a business outside the maritime category, it will be more difficult to establish that the use of the boat for that purpose is essential to the efficient conduct of the relevant business. A taxpayer who is dissatisfied with a decision of the Commissioner on these questions, will, of course, have the right to take the matter to a Board of Review for review.

Land, or a building or other structure, will qualify as an "excepted facility" - and thus be excluded from the "leisure facility" category - if, at all relevant times, it is held by the taxpayer for sale in the ordinary course of a business of selling such property. Land, or a building or other structure will also qualify as an "excepted facility" if, at all relevant times it is used or held for use by the taxpayer - principally for one or more of the following purposes -

(a)

the purpose of the derivation of income in the nature of rents, lease premiums, licence fees or similar charges (e.g., a seaside cottage regularly let to tenants);

(b)

the purpose of the provision for reward of facilities for holidays or for sport, recreation or similar leisure time pursuits in the ordinary course of a business of providing such facilities (e.g., squash courts regularly let on hire); or

(c)

the purpose of the provision of facilities for holidays or for sport, recreation or similar leisure-time pursuits where the facilities are for use principally by employees of the taxpayer or, in the case of a company, by employees who are not directors or shareholders of the company or for the care of children of those employees (e.g., a swimming pool in the vicinity of a factory that may be used by employees in general).

Sub-section (2) of section 51AB will provide a safeguard against attempts to circumvent the intended effect of the section, for instance, by arranging for a boat to be acquired by a company and let out on hire at a relatively small charge to an associated company (so that it apparently qualifies as an "excepted facility" in the hands of the owner) for use by the associated company for purposes not covered by the definition of "excepted facility". Where a boat or other property would qualify as an excepted facility because something of this kind is done, and the Commissioner forms the opinion that it would not have been done, or that something different would have been done, but for the enactment of section 51AB (e.g., that the boat mentioned would otherwise have been purchased by the associated company that uses it as a leisure facility), the boat or other property is deemed by sub-section (2) not to be an excepted facility. A taxpayer dissatisfied with an opinion formed by the Commissioner in this regard will have a right to take the matter to a Board of Review for review.

Sub-section (3) of section 51AB specifies the kinds of losses or outgoings to which the section is to apply and which, by virtue of sub-section (4), are not to be allowable deductions. Under the terms of sub-section (3), the section will apply to fees to secure or maintain membership of a club (as defined in sub-section (1)), whether the fees are paid by the member or by another person such as the member's employer and whether the fees relate to full membership or something less than that such as provisional membership. In relation to a boat or other leisure facility, sub-section (3) is designed to have section 51AB apply to the whole range of losses or outgoings that occur by reason that the facility is used or held for use by the taxpayer. As well as ordinary costs of operating and maintaining a leisure facility, such things as land rates, boat registration fees and boat mooring fees are classes of expenditure to which the section will apply.

Sub-section (4) is the operative provision in section 51AB. It provides that, notwithstanding any other provision of the Principal Act, a loss or outgoing to which the section applies is not an allowable deduction. But this general prohibition is qualified by sub-section (5).

Sub-section (5) will allow account to be taken of situations where property is a leisure facility in relation to a year of income but would not have been a leisure facility if the use to which it was principally applied during a particular part of the year had extended over the whole year. An example would be a boat used principally for the purposes of commercial fishing operations for the first 3 months of a year of income and, following a cessation of the fishing business, used principally for pleasure during the other 9 months of the year.

But for sub-section (5), section 51AB would prevent the allowance of the total losses and outgoings incurred during the year of income in relation to the boat - including those attributable to the 3 months during which it was used principally for the purposes of the fishing operations. Sub-section (5), however, facilitates the avoidance of such anomalies. It authorises the Commissioner to determine, in situations of this nature, that section 51AB shall not prevent the allowance of deductions for so much of a year's losses or outgoings in relation to a leisure facility as he considers reasonable having regard to the circumstances of the particular case. A taxpayer dissatisfied with a determination of the Commissioner in this respect may take the matter to a Board of Review for review.

Sub-section (6) of section 51AB is a drafting measure to secure an appropriate application of the section in cases where a taxpayer owned, or had rights to use, a boat, land or a building or other structure for less than the full year of income. In the absence of a provision of this nature, the tests for qualification as an excepted facility could not be satisfied in such cases.

By sub-clause (2), proposed section 51AB is, as mentioned above, to apply to assessments in respect of income of 1974-75 and subsequent years of income.

Clause 10: Export market development allowance.

Section 51AC of the Principal Act authorises the allowance of a special deduction for specified classes of expenditure incurred after 30 June 1961 and before 1 July 1968 primarily and principally in the promotion of exports of Australian goods and services. The special deduction, which is additional to any deduction allowable for the expenditure under other provisions of the Act, is limited to the amount that will result in the total tax saving from the special deduction and any deduction allowed under other provisions of the Act not exceeding 80 cents for each dollar of expenditure. In practice, the section can now apply only in cases where expenditure incurred before 1 July 1968 is an element in losses being carried forward for deduction.

An amendment to the section is necessary in consequence of the proposed imposition, by clause 8 of the Income Tax Bill 1974, of a tax surcharge on property income. The surcharge cannot be ascertained until the taxable income has been determined and accordingly it is not practicable for the surcharge to be taken into account in calculating the tax saving under section 51AC, since this would affect the amount of the deduction under section 51AC and the amount of taxable income.

Sub-clause (1) of clause 10 will amend the definition of the term "the tax saving" in section 51AC to the effect that the property income surcharge is not to be taken into account in the calculation of "the tax saving".

Sub-clause (2) of clause 10 provides that the amendment of the definition of "the tax saving" in section 51AC will apply in respect of income of the 1974-75 and subsequent income years.

Clause 11: Depreciation.

Under the depreciation provisions of the income tax law deductions for depreciation are allowable in respect of plant or articles owned by a taxpayer and used by him during the year of income for the purpose of producing assessable income. Deductions are also allowable in respect of plant or articles, which, although not actually used for the purpose of producing assessable income during the year, were installed for use for that purpose during the year of income and were held in reserve by the taxpayer.

For the purposes of depreciation allowances, "plant" is defined in section 54 of the Principal Act. Sub-section (2) of that section operates to give an expanded meaning to the word "plant" by providing for the inclusion in that meaning of certain categories or items listed in the sub-section. Paragraph 54(2)(c) includes in the definition of "plant", for depreciation purposes, plumbing fixtures and fittings acquired or installed after 30 June 1938, and forming part of the toilet accommodation and washing facilities provided by an employer principally for the use of persons employed in his business.

The fixtures and fittings to which the paragraph extends include wall and floor tiling, terazzo, marble, concrete, stone, magnesite and similar paving and surface finishes, as well as plumbing fixtures and fittings, sanitary ware, sewerage piping, etc. Also included are internal partitions of wood, steel, brick, etc. in toilet and shower rooms, but not walls, roofs and work of a similar structural nature.

Paragraph (a) of sub-clause (1) of clause 11 proposes an amendment of paragraph 54(2)(c) of the Principal Act so as to make it clear that expenditure incurred by employers on providing plumbing fixtures and fittings of the kinds specified in the paragraph qualify for depreciation allowances where they are provided principally for use in the care of children of employees. Thus, plumbing fixtures and fittings provided in a child care centre established for the benefit of employees' children at or adjacent to the factory or other business premises will qualify for depreciation allowances.

Plumbing fixtures and fittings that qualify for depreciation deductions under the amended paragraph 54(2)(c) are depreciable at ordinary rates of depreciation based on the estimated effective life of each unit of property in accordance with the provisions of sections 55 and 56 of the Principal Act.

Paragraph (b) of sub-clause (1) of clause 11 will insert two new provisions in section 54. A new sub-section (3) will preclude the allowance of deductions for depreciation of property that is a "leisure facility" in relation to the year of income for the purposes of section 51AB (see notes on clause 9). Where a "leisure facility" is used at all times during a part of a year of income for purposes specified in the definition of "excepted facility" in section 51AB, the new sub-section (4) of section 54 makes the prohibition in sub-section (3) inapplicable to depreciation that took place during that part of the year.

Sub-clause (2) of clause 11 proposes that the amendments made by sub-clause (1)(b) dealing with depreciation on leisure facilities will apply in assessments based on income derived during the 1974-75 year of income and subsequent years.

Clause 12: Basis of Depreciation

For the purposes of applying the depreciation provisions of the income tax law, section 55(1) of the Principal Act establishes the general rule that, in the first calculation of the depreciation in respect of any unit of property, an estimate shall be made by the Commissioner of Taxation of the effective life of the unit of property, assuming that it is maintained in reasonably good order and condition. The annual depreciation rate is fixed by this estimate.

An exception to the normal rates of depreciation determined under sub-section (1) is provided in sub-section 55(2), the effect of which is to authorise the allowance of depreciation in respect of, and provide a special rate of depreciation of 33 1/3 per cent per annum for, certain classes of amenities provided by an employer for his employees.

This special rate is, in effect, a standard rate, and it applies to plant and equipment used in dining rooms, mess rooms, cafeterias, etc., which are used by an employer for the purposes of providing meals or facilities for meals for employees. It also applies to fixtures and fittings provided in locker rooms, change rooms, rest rooms, casualty wards, recreation rooms and the like and includes clothing cupboards, lockers and similar fixtures and fittings which do not form part of the permanent structure. Plumbing fixtures and fittings forming part of the cafeteria, kitchen, rest or recreation room equipment are also subject to depreciation at the special rate of 33 1/3 per cent.

Sub-section 55(2) requires that the persons for whom the taxpayer provides the relevant facilities be employees of a business carried on by the taxpayer for the purpose of producing assessable income. It is intended by clause 12 to amend sub-section (2) so that depreciation will also be allowable, and at the same special 33 1/3 per cent rate, on facilities of the kinds described if the facilities are provided for the care of children of persons employed in the taxpayer's business.

This amendment is complementary to that proposed by clause 11, and will make it clear that facilities as described and forming part of a child care centre for employees' children established at or adjacent to the work premises are depreciable at the special rate.

Clause 13: Moneys paid on shares for the purposes of certain exploration, prospecting or mining.

This clause proposes minor technical amendments to section 77D of the Principal Act consequential on the amendments to be made by clause 33 of the Bill.

In broad terms, section 77D authorises the allowance of income tax deductions to residents of Australia for money subscribed on shares in companies engaged in mining or prospecting for petroleum or other minerals in Australia or Papua New Guinea. However, deductions under section 77D are not generally available in respect of moneys paid on shares after 7 May 1973, the date on which the deductions were, subject to certain transitional arrangements, terminated.

To enable shareholders to participate in deductions under section 77D, the company to which capital was subscribed was required to lodge with the Commissioner a declaration that the capital would be spent on eligible mining or prospecting activities. The company thereby transferred to the subscribers the entitlement to deductions that would otherwise have been allowable to it under Division 10 or Division 10AA in respect of expenditures on these activities.

Paragraph (a) of clause 13 provides for a minor drafting amendment of the definition of "mining or prospecting outgoings" in sub-section 77D(1). This expression relates to outgoings of a company which qualify under the provisions of section 77D as eligible outgoings in carrying on mining prospecting or exploring for petroleum or other minerals. The expression contains a reference to allowable capital expenditure incurred in relation to petroleum within the meaning of section 124DD of the Principal Act. As section 124DD is to be repealed by clause 33 of the Bill, paragraph (a) specifically identifies the reference to that section in section 77D(1) as applying to the provision of the Principal Act.

Paragraph (b) is also a drafting measure designed to continue the operation of section 77D(20) which has effect for the purposes of the adjustments to be made in the deductions for which a company would otherwise be entitled for capital expenditure under Division 10 or Division 10AA.

As explained above, by lodging a declaration under section 77D a company transfers to subscribers an entitlement to deductions of an equivalent sum for capital expenditure on exploration and mining that it might itself otherwise attract. Paragraphs (a) and (b) of sub-section 77D(20) apply to determine whether general mining deductions under Division 10 or petroleum mining deductions under Division 10AA are to be forgone as a result of a declaration made under section 77D. This dissection between the two Divisions is made in accordance with the actual expenditures made by the company.

The proposed amendment will insert appropriate references in section 77D(20) to relevant provisions in the proposed new Division 10AA which is to replace the present Division 10AA that is being repealed by clause 33 of the Bill.

Clause 14: Deductions for dependants.

Section 82B of the Principal Act authorises the allowance of concessional deductions for the maintenance by a taxpayer of certain classes of dependants specified in sub-section 82B(2).

The classes of dependants and the maximum deductions allowed for dependants in each class are set out below:-

By this clause it is intended to remove a condition of eligibility imposed by sub-section 82B(1) on the concessional deductions for maintenance that the person being maintained by the taxpayer be a "resident" of Australia or of Papua New Guinea.

The requirement as to residence for purposes of section 82B is to be removed in relation to claims for the maintenance of dependants during the 1974-75 income year and subsequent years. Although, for purposes of the maintenance deduction, the residence requirement will no longer apply in relation to dependants, the test of residence will, under the terms of section 82A of the Principal Act, continue to apply to a taxpayer claiming a deduction of this kind.

Clauses 15 and 16: Education expenses and expenses of self-education.

The purpose of clause 15 is to reduce from $400 to $150 the maximum yearly deduction available to a taxpayer under sub-section 82J(4) of the Principal Act in respect of the education expenses of a student who is receiving full-time education at a school, college or university or from a tutor. The clause will also effect a complementary amendment to sub-section 82J(5) which applies where two or more persons contribute to the education expenses of the same student. In these circumstances, the sum of the deductions allowable overall in relation to the expenses in respect of any one student is also to be reduced from $400 to $150.

Section 82JAA of the Principal Act authorises the allowance of deductions for expenses of self-education paid by a taxpayer for fees, books and equipment necessarily incurred in undergoing a course of education provided by a school, college, university or other place of education for the purpose of gaining qualifications for use in carrying on a profession, business or trade or in the course of employment.

Consistently with the reduction to be effected by clause 15 in the maximum deduction available for education expenses under section 82J, clause 16 will amend sub-section (3) of section 82JAA to reduce from $400 to $150 the maximum deduction allowable to a taxpayer in any year of income for self-education expenses.

The amendments to these provisions will apply to assessments in respect of the 1974-75 income year and subsequent years.

Clause 17: Subdivision C - Interest in respect of Housing Loans.

This clause proposes the insertion in Division 3 of Part III of the Principal Act of a new Subdivision - Subdivision C. The new Subdivision contains the substantive provisions that are to provide an income tax deduction for interest paid on home loans.

Interest deductibility scheme

Broadly stated, the proposed deduction will apply to interest paid by a resident taxpayer on loan moneys used to purchase, construct or extend a house he uses as his sole or principal residence in Australia. Interest on money borrowed to acquire a caravan or a holiday flat or cottage will not qualify for deduction. Where a loan is used to acquire vacant land, interest paid in respect of the loan will be first deductible in respect of the year of income in which a dwelling erected on the land is first used by the taxpayer as a sole or principal residence.

As a general rule, the deduction will be available for interest payments made on or after 1 July 1974. The deduction will not extend to interest due for payment before that date.

At a net income level of $4,000 or less in the year of income a taxpayer will be entitled to a deduction for the whole amount of housing loan interest payments. Where the level of income is greater than $4,000, the deduction to be allowed will be reduced by 1 per cent for each complete $100 of the excess. This means, for example, that 80 per cent of interest will be deductible at an income level of $6,000 and one-half at an income level of $9,000, and so on. No deduction will be allowable where the income level is $14,000 or more. The various percentages of housing loan interest payments to be deductible under the proposed formula in assessments of taxpayers whose net income for the year does not exceed $14,000 are set out in a statement appearing at the end of the notes on clause 17.

In measuring the deduction, the net income of the taxpayer will be combined with the net income of his or her spouse. Their combined net income will in effect be their total income less the expenses incurred in earning it, other than expenses of a private, domestic or capital nature. Payments received by way of child endowment or domiciliary nursing care benefits are to be ignored for purposes of the net income calculation. Receipts that are not of an income nature (e.g., a lottery prize) would also not affect the net income calculation.

For a wage earner with no other income, net income will generally be the amount of his wages less union dues. In other cases, net income will be the taxpayer's net income derived from a business or profession determined according to ordinary concepts.

Loans related to new houses, flats or home units as well as previously-occupied dwellings will be eligible for the interest deductions. Deductibility will not depend on the borrower's age or marital status, and will generally be available irrespective of the rate of interest charged in respect of the housing loan.

Where a borrower finds it necessary to use normal bridging finance pending the receipt of a long-term loan from a building society or some other source, interest paid in respect of the bridging loan (and the refinancing loan) will generally be available for deduction. Other non-reducible loans will be able to attract interest deductibility for a limited period.

Loans for the purpose of constructing a garage, swimming pool, etc., or to purchase furniture, carpets or other furnishings, will not qualify as housing loans eligible for interest deductions.

Further details of the proposed housing loan interest concession are provided in the following notes on the proposed provisions of Subdivision C of Division 3.

Section 82KA: Interpretation.

Sub-section (1) of the proposed section 82KA defines certain terms used in Subdivision C. The definitions, which are explained below, are designed to facilitate the drafting of the provisions that are to give effect to the allowance of income tax deductions for interest paid in respect of housing loans, where the specific conditions for deductibility are satisfied.

"building society" means a body that, irrespective of its name, is of a kind commonly known as a building society. The definition is related to provisions contained in section 82KB (see notes on sub-section (4) of that section) that are necessary to ensure that the housing loan interest deduction applies to interest on loans made to members of an actuarial type building society on a basis comparable to interest on loans obtained by borrowers from other building societies or lending institutions.

"dwelling" means, in effect, a unit of residential accommodation constituted by or contained in a building, or a part of a building, in Australia. An effect of this definition is that interest on a loan applied to a dwelling outside Australia will not be deductible.

"gross income", in relation to a person, means, in broad terms, his or her total income (including income exempt from tax) from all sources, other than child endowment payments and domiciliary nursing care benefit payments. The definition of "gross income" is related to the proposed definition of "net income" (see notes below on that term) and, consequently, to the proposed combined net income test which will determine the level of deductions allowable to a taxpayer under the new Subdivision in relation to housing loan interest payments.

"net income" means the "gross income" derived by a person in a year of income as reduced by any expenses (not being expenses of a capital, private or domestic nature) incurred in deriving that income, and any deductions allowed or allowable in respect of that year of income under sections 51A, 52 and 54 of the Principal Act. Reference is made to these sections to ensure that, in calculating net income for purposes of Subdivision C, regard is had to any deductions allowed or allowable in respect of, respectively, living-away-from-home allowances, losses on property acquired for re-selling at a profit and depreciation allowances on plant and equipment. As already mentioned, the level of a taxpayer's net income for the year of income, combined in appropriate cases with the level of net income derived by his or her spouse in that same year of income, will determine the extent to which housing loan interest payments are deductible for income tax purposes under Subdivision C. This aspect of the new deduction is explained in more detail in the notes dealing with proposed section 82KC.

"stratum unit" means a unit on a unit plan registered under an appropriate statute providing for the registration of titles of a kind known as unit titles or strata titles. The definition covers both vertical development (e.g., a flat or home unit) and horizontal development (e.g., the villa-home type of construction) which are intended to be within the scope of the proposed deduction for housing loan interest payments.

"taxpayer" means a taxpayer (other than a company) who is a resident of Australia. The effect of the definition is to restrict the allowance of the housing loan interest concession to natural persons who are residents of Australia.

Sub-section (2) of section 82KA is a drafting measure comprising two paragraphs - paragraphs (a) and (b) - that specify the circumstances in which a person, or two or more persons jointly, shall be taken, for purposes of proposed Subdivision C, to acquire or hold either "a prescribed interest" in land or in a stratum unit, or "a proprietary right" in respect of a flat or home unit under a sub-divided residence scheme. The basic purpose of sub-section (2) is to facilitate the drafting of the provisions to authorise the allowance of deductions for interest payments in respect of loan moneys used by a taxpayer to acquire a block of residential land, to construct or extend a dwelling on the land, or to purchase a dwelling (including a flat or home unit).

Paragraph (a) of sub-section (2) consists of a series of provisions - sub-paragraphs (i) to (iv) inclusive - relating to the various forms of tenure that are to constitute a prescribed interest in land or in a stratum unit for purposes of the interest deductibility provisions.

Sub-paragraph (i) of paragraph (a) provides in effect that a person who holds or acquires an estate in fee simple in land or in a stratum unit, shall be taken to acquire or to hold a prescribed interest in the land or unit. It also provides for two or more persons to be taken as acquiring or holding a prescribed interest in land or a stratum unit where those persons acquire or hold an estate in fee simple as joint tenants or tenants in common.

Sub-paragraph (ii) of paragraph (a) refers to the situation where a person's interest in land or in a stratum unit is acquired or held, either solely or jointly with others, under a lease or licence. For interest deduction purposes, a lease or licence will qualify as a prescribed interest in land where the Commissioner is satisfied that the lease or licence gives the person reasonable security of tenure for a period of not less than 10 years.

Sub-paragraph (iii) of paragraph (a) provides that a person who acquires or holds a sole or joint interest in land or in a stratum unit, as purchaser of an estate in fee simple under a contract that provides for payment of the purchase price or part of the purchase price to be made at a future time or by instalments, shall be taken to acquire or to hold, as the case requires, a prescribed interest for purposes of Subdivision C. Sub-paragraph (iii), in conjunction with proposed sub-section 82KF(1), extends the proposed deductions to a taxpayer who incurs interest under a contract entered into for the purchase of a home.

Sub-paragraph (iv) of paragraph (a) is designed, in conjunction with the drafting provisions of sub-section 82KF(1), to extend the deductions to cases where interest is paid by a taxpayer under a contract whereby a sole or joint interest is held or acquired in land or a stratum unit as purchaser of the right to be granted a lease of the land or unit. A person entering into such a contract will be taken to acquire or to hold a prescribed interest in the relevant land or unit where the Commissioner is satisfied that the lease offers reasonable security of tenure for a period of not less than 10 years.

Paragraph (b) of sub-section (2) refers to a taxpayer who acquires or holds sole or joint rights of occupancy in a flat or home unit through ownership of, or a contract to buy, shares in the company that owns the building containing the flat or home unit. Such a taxpayer is, for purposes of the interest deduction provisions, to be taken as acquiring or holding "a proprietary right" in the flat or home unit. Paragraph (b) ensures that a taxpayer who has borrowed money to purchase shares in a home-unit company so as to establish rights of occupancy in a flat or home unit will be able to claim deductions for the interest payments where the necessary conditions for deductibility are met.

Section 82KB: Deductions in respect of interest paid on housing loans.

Section 82KB is the operative section. It provides income tax deductions in respect of interest on a housing loan connected with a dwelling used during the whole or part of the year of income as the taxpayer's sole or principal residence.

The deduction allowable will, in pursuance of section 82KB, be based on the total amount of housing loan interest payments if the loan moneys to which the payments relate were applied for purposes connected with the dwelling, and for no other purpose.

If the loan moneys were applied by the taxpayer only partly for purposes connected with the dwelling the Commissioner is to be enabled (see notes below on section 82KB(2)(a)) to apportion the total interest paid by a taxpayer in the year of income so that the new concessional deduction can be based on only so much of the total interest as was incurred on the part of the loan moneys applied for qualifying purposes.

Section 82KB(2) extends to certain other situations in which it is appropriate to apportion total interest in determining the entitlement to housing loan interest deductions viz.,

•

where the taxpayer would otherwise qualify for deductions in respect of loan moneys connected with two (or more) private dwellings; (see notes below on section 82KB(2)(b) and (c))

•

where the interest payments are in respect of a loan that relates to a dwelling used partly for private residential purposes and partly for another purpose. (See notes below on section 82KB(2)(d))

Sub-section (1) of section 82KB has the effect of authorising deductions for interest paid in respect of a housing loan connected with a dwelling used for the whole or a part of a year of income as a sole or principal residence. The allowance of the deductions is made subject to sub-section (2).

Sub-section (2) of section 82KB relates to the apportionment of total interest paid by a taxpayer in a year of income in certain specified situations where it would not be appropriate to allow deductions based on the total interest. Where sub-section (2) applies, the Commissioner is to be required to determine how much of the total interest payment can reasonably be regarded as housing loan interest for purposes of the new deduction. A determination of the Commissioner under sub-section (2) will be subject to the usual rights of objection and reference to an independent Taxation Board of Review.

Paragraph (a) of sub-section (2) of section 82KB applies where the loan moneys in respect of which the interest is paid were used partly for a qualifying purpose and partly for some non-qualifying purpose. Paragraph (a) would, for example, apply to a case where loan moneys were used to acquire a home and a car, so that the Commissioner would then be authorised to base the interest deduction on so much only of the total interest paid as relates to the amount used to acquire the home. The interest applicable to the purchase of a private car would not, of course, be eligible for deduction.

Paragraph (b) of sub-section (2) applies to a case where a taxpayer pays interest on a loan applied in connection with a dwelling used as a sole or principal residence and also in connection with another dwelling. Only so much of the interest payments as can appropriately be related to the sole or principal residence is to be deductible.

Paragraph (c) of sub-section (2) applies to a situation where a taxpayer's interest payments for the year of income relate to more than one dwelling used during that year as the sole or principal residence. In these cases, the interest deduction allowable under Subdivision C is to be based on so much only of the total interest payments as, in the opinion of the Commissioner, is reasonable in all the circumstances.

The following is an example of the type of case to which paragraph (c) would apply:

Example

Taxpayer resides principally in dwelling A up to 31 December 1974 and pays interest in respect of it during the year of income as follows:

In January 1975 taxpayer acquires dwelling B which is occupied as a sole or principal residence as from 31 March 1975 and pays interest in respect of it during the 1974/75 income year as follows:

In this situation, assuming that no part of the interest paid in the 1974/75 income year is deductible under the general deduction provisions of the income tax law, it would be appropriate to allow interest deductions for that year based on $1,100 representing -

(a)

the whole of the interest paid in the year of income in respect of dwelling B (i.e., $700);

(b)

so much of the interest paid in respect of dwelling A as is attributable to the period to 31 December 1974 when it ceased to be the taxpayer's place of residence (i.e., $400).

Paragraph (d) of sub-section (2) applies where all or part of the dwelling, the building containing the dwelling or the land on which the building stands, was, during the whole or a part of that year of income, used by the taxpayer either -

(i)

for the purpose of gaining or producing income or for carrying on a business for that purpose; or

(ii)

for any other purpose not being use of the dwelling as a sole or principal residence.

Where paragraph (d) applies, the Commissioner is required to determine how much of the total interest payment for the year of income is related to the use as a private residence of the dwelling by the taxpayer. For example, if a taxpayer pays interest in respect of loan moneys applied to acquire a building containing shop premises (which are used for income-producing purposes) and a flat (which is used as the private residence), it will be necessary to apportion the total interest payments for the year of income to determine how much of the interest may appropriately be regarded as attributable to the shop premises on the one hand (this proportion of the interest would normally qualify for deduction as a business expense under the general deduction provisions of section 51) and to the residence on the other.

Sub-section (3) of section 82KB is a drafting measure which provides for a reference in sub-section 82KB(2) to a dwelling to be taken as including a reference to a garage or store-room used in association with a flat or home unit. It is designed to ensure, for example, that the provisions of paragraph (d)(i) of sub-section 82KB(2) will cover a case where a garage or store-room associated with a private home unit is used for income-producing purposes. In such a case the Commissioner will be authorised to apportion the total interest between the part applicable to the home unit, etc. and the part applicable to the garage.

Sub-section (4) is designed to cover the special situation building societies, generally of the kind known as terminating building societies, that have adopted an actuarial structure for purposes of their accounting procedures.

The actuarial type of building society is, simply stated, based on borrowers making fixed repayments in respect of their loans over a defined period (the period of the society). These subscriptions are treated in the accounts of the society as accumulating at a notional rate of interest over that period. After obtaining a loan, a member is required to make additional payments, also of a fixed amount, representing in effect interest on the total sum advanced by the society. Each member who has borrowed from an actuarial-type building society therefore has, in the books of the society, a credit for monthly loan repayments with interest notionally provided thereon, and a debit for the total loan moneys that have been advanced by the society on which he pays interest over the life of the society.

The purpose of sub-section (4) is to put borrowers from this type of building society on a basis comparable to that being extended to other taxpayers who obtain housing finance from building societies and other lending institutions that make loans under the credit foncier accounting system. To this end, sub-section (4) provides in effect that deductions for a borrower from an actuarial type of building society are to be based on the "net" interest incurred during the relevant year of income. The "net" interest is the amount paid in the year by way of simple interest on the total loan as reduced by the amount of interest credited or allowed the borrower (not being an amount that is included in assessable income) in respect of loan repayments.

Where a relevant building society loan was made to the taxpayer and another person jointly, sub-section (4) empowers the Commissioner to determine how much of the interest credited or allowed to the taxpayer and that other person in respect of their loan repayments should be taken into account in calculating the interest on which the taxpayer's deductions are to be based. A determination by the Commissioner under sub-section (4) will be subject to the usual rights of objection and review by a Taxation Board of Review.

Sub-section (5) of section 82KB caters for a situation where an amount is paid by a taxpayer to a lender by way of an advance payment on account of interest expected to accrue subsequent to the year of income in which the payment is made. The effect of sub-section (5) is that the interest deductions will, in these cases, be related to the year of income in which the advance payment, or a part of it, is applied in settlement of interest that became payable by the taxpayer in that year.

Section 82KC: Reduction of deduction for interest on housing loan.

This section contains the provisions relating to the proposed "combined net income" test under which the deduction otherwise available for interest on housing loans is to be reduced where the level of combined net income for the year of income falls between $4,099 and $14,000. Application of the test also means that deductions for interest on a housing loan will not be available where combined net income exceeds $14,000 in the year of income. Where combined net income does not exceed $4,099 deductions will be based on total eligible housing loan interest payments. The statement appearing at the end of the notes relating to clause 17 shows the percentage deductions for interest payments that will be allowable under the proposed combined net income test.

Sub-section (1) of section 82KC provides that where a taxpayer's net income for the year of income exceeds $4,000, the amount that would otherwise be an allowable deduction in respect of housing loan interest payments for the year shall be reduced by one per cent of that amount for each $100 by which net income exceeds $4,000.

As indicated in the explanatory notes relating to section 82KA(1), "net income" means, broadly, the gross income from all sources less the expenses (other than expenses of a capital, private or domestic nature) incurred in earning it, including any deductions under sections 51A, 52 and 54 of the Principal Act.

The effect of sub-section (2) of section 82KC is that, in the general run of cases, the net income of a taxpayer for a year of income is to be taken as also including the net income (if any) derived by his or her spouse in that year of income. Sub-section (2) only applies where the interest payments for which deductions are sought are in respect of a housing loan connected with a dwelling that has been used during the year of income by the taxpayer and spouse as their sole or principal residence. Provision is made, by sub-sections (3) and (4), for certain income (e.g., income derived by a spouse prior to marriage) to be disregarded for purposes of calculating the combined net income for the year of income where it is appropriate to do so.

Sub-section (3) is designed to make it clear that income derived by a spouse before the date of marriage to the taxpayer during the year of income is not taken into account in determining the deduction allowable to the taxpayer for housing loan interest payments made during the year of income in which they married. The operation of the sub-section is made subject to sub-section (6).

Sub-section (4) applies where a taxpayer and his or her spouse separated during a year of income. It provides that, in these circumstances, a taxpayer's claim for a deduction in respect of the housing loan interest payments made in a year of income will be unaffected by the amount of any net income derived by the spouse after the date of the separation.

Sub-sections (5) and (6) of section 82KC are designed to ensure that the combined net income test will apply, for purposes of measuring allowable deductions for housing loan interest payments, on a consistent basis as between married couples and unmarried couples living together.

Sub-section (5) provides that sub-sections (2), (3) and (4) are to apply to and in relation to a man and a woman living together as husband and wife on a bona fide domestic basis, although they are not legally married to each other, in the same way as those sub-sections would apply if the couple were legally married to each other.

Sub-section (6) provides for a situation where, immediately before the marriage of a taxpayer took place, the taxpayer and the other party to the marriage were living together as husband and wife on a bona fide domestic basis. It specifies that, in these circumstances, sub-section (3) does not apply to the taxpayer otherwise than in accordance with sub-section (5). This means, in effect, that, in these cases, regard will be had to the date on which the taxpayer and the other person commenced to live together on a bona fide domestic basis (and not to the date of their marriage) for purposes of applying the combined net income test.

Section 82KD: When interest deemed to be paid in respect of housing loan.

This section qualifies the operation of section 82KB under which deductions are allowable in respect of amounts paid as interest on a housing loan. Broadly stated, section 82KB provides that a taxpayer who pays interest in respect of a housing loan connected with a dwelling that was used during the year of income as the taxpayer's sole or principal residence is entitled to a deduction based on the total interest payment for the year or, in certain specified situations, for part of the total interest.

The restrictions to be placed by section 82KD on the allowance of interest deductions under section 82KB are generally in the nature of safeguards against certain kinds of borrowing arrangements that might otherwise be devised or used to obtain taxation benefits well in excess of those available to other taxpayers financing the purchase of homes by normal housing finance.

Sub-section (1), a drafting measure, provides that a reference in section 82KD to a "taxpayer", except in reference to an amount paid by a taxpayer, includes a reference to a taxpayer and another person.

Sub-section (2) makes it clear that, for purposes of proposed Subdivision C, an amount shall be taken to have been paid by way of interest in respect of a loan connected with a dwelling - an essential requirement for deductions under the Subdivision - only if that amount is to be so regarded in terms of section 82KD.

Sub-section (3) of section 82KD provides, in effect, that an amount paid by way of interest on loan moneys applied either wholly or principally for housing purposes connected with a dwelling will not qualify for deduction unless either -

•

the loan moneys, under the terms on which they are lent to the taxpayer, are to be wholly or substantially repaid by the taxpayer by instalments payable at regular intervals of 3 months or less; or

•

the interest payment relates to interest that accrued in respect of a period within the 3-year period commencing on the date on which the relevant loan moneys were obtained or 1 January 1975, whichever is the later date.

Sub-section (3) will not affect the allowance of interest deductions in respect of housing loans of the traditional kind made by lending institutions. Nor will it affect the allowance of deductions for interest paid on normal bridging finance. Certain loan arrangements (e.g., roll-over loans) that are not repaid by regular instalments over the period of the loan will also be unaffected and able to attract interest deductibility provided the loan is re-financed by reducible housing finance within the specified 3-year period.

The objective of sub-section (3) is to deter the use of certain types of borrowing arrangements (including a series of roll-over loans) that do not provide for the borrower to make loan repayments and reducible interest payments over the borrowing period.

Sub-section (4) is related to the commencement date of the 3-year period specified in sub-section (3). Sub-paragraph (b) of sub-section (3) provides that, where loan moneys are applied wholly or principally to repay an earlier loan that was applied by the taxpayer for housing purposes connected with a dwelling, the commencement date of the 3-year period is the later of 1 January 1975 or the date on which the earlier housing loan was made to the taxpayer. This earlier housing loan could, conceivably, itself have qualified as a housing loan under Subdivision C by virtue of having been applied wholly or principally to repay an earlier housing loan or loans (referred to as the "preceding loan" or the "preceding loans"). To cover this possibility, sub-section (4) provides in effect that the 3-year period specified for purposes of sub-section (3)(b)(ii) is to be the period of three years commencing on the date on which the earlier, or earliest of the, preceding loan or loans were made to the taxpayer.

Sub-section (5) of section 82KD requires, as a condition for interest deductions for moneys lent to a taxpayer by way of bank overdraft, that the lending bank record withdrawals and repayments etc. relating to the loan in a separate account. The provision is part of the measures considered necessary to ensure that deductions are not available for payments that are not strictly housing loan interest payments. Sub-section (5) will also have the effect of simplifying the operation and administration of the new deduction. Very real practical difficulties in identifying interest eligible for deduction as housing loan interest could inevitably be faced by borrowers and lending banks as well as the Taxation Office, if interest on a general-purpose overdraft account could qualify for deduction.

Sub-section (6), also a safeguarding measure, proposes to exclude from the scope of the interest deduction loan arrangements made by persons not dealing with each other at arm's length in relation to the arrangements, if the rate of interest payable in respect of the loan is greater than might reasonably have been payable if the parties had negotiated the loan on a commercial footing. This restriction should generally ensure that loan arrangements between persons not dealing with each other at arm's length in relation to the loan do not provide for interest rates to be set at an unreasonably high rate in order to maximise the taxation benefits to the borrower.

Sub-section (7) of section 82KD provides that interest payments made in a year of income in respect of a housing loan connected with a dwelling are not eligible for income tax deductions unless during the year of income the taxpayer held - either solely or jointly with some other person or persons - a prescribed interest in the land on which the dwelling was constructed, a prescribed interest in a stratum unit in relation to the dwelling or, in the case of a flat or home unit, a proprietary right in respect of the dwelling.

This measure is designed to ensure that the benefits of the proposed housing loan interest deduction are only available where the taxpayer paying the interest in respect of a loan connected with a dwelling is the owner-occupier or long term lessee or licensee of the relevant property in the year of income.

Section 82KE: When moneys deemed to be applied for housing purposes.

This section proposes, as its basic purpose, the ways in which loan moneys will need to be expended by a taxpayer in relation to his home if the moneys are to qualify as a housing loan in respect of that dwelling and so be eligible for interest deductibility.

Sub-section (1) of section 82KE, by means of a series of paragraphs numbered (a) to (h) inclusive, specifies the purposes for which loan moneys must be applied wholly or principally in relation to a dwelling in order to be regarded as applied for housing purposes connected with that dwelling. Only moneys so applied are to attract interest deductions under proposed Subdivision C.

Paragraph (a) of sub-section (1) provides that moneys lent to a taxpayer that were applied wholly or principally to acquire a prescribed interest in land on which a dwelling has subsequently been constructed, or to acquire such an interest in land and construct, or complete the construction of, a dwelling on the land are to be regarded as applied for housing purposes connected with that dwelling.

The various forms of tenure that constitute a "prescribed interest" in land for purposes of Subdivision C are explained in the earlier notes on sub-section 82KA(2)(a). By reason of the sole or principal residence test set out in section 82KB, interest paid in respect of loan moneys used to acquire vacant residential land may qualify for the interest deduction commencing with the year of income in which a dwelling erected on the land is used by the taxpayer as a sole or principal residence.

Paragraph (b) provides that loan moneys applied wholly or principally by a taxpayer to construct or complete the construction of a dwelling or a building containing a dwelling on land in which the taxpayer held a prescribed interest are to be regarded as applied for housing purposes connected with that dwelling.

Paragraph (c) provides that loan moneys applied by a taxpayer wholly or principally to acquire a prescribed interest in land on which there was a dwelling or a building containing a dwelling are to be regarded for interest deductibility purposes as applied for housing purposes connected with the dwelling.

Paragraph (d) covers the application of loan moneys to acquire a prescribed interest in a stratum unit in relation to a dwelling. Loan moneys applied by a taxpayer wholly or principally for such a purpose are regarded as applied for housing purposes connected with the dwelling.

Paragraph (e) specifies that loan moneys applied by a taxpayer to add an additional room or rooms to a dwelling on land in which he holds a prescribed interest are to be taken as used for housing purposes connected with that dwelling. The provision does not apply to confer deductions in respect of loan moneys used to finance, independently of the construction of the dwelling, the construction of other types of improvements on residential land, e.g., a carport or garage, swimming pool, a fence or retaining wall, etc.

Paragraph (f) serves a similar purpose to the preceding paragraph - paragraph (e) - by catering for the possibility of a taxpayer, whose home is subject to a stratum title, applying loan moneys to finance extensions to the home. Loan moneys applied wholly or principally in this way are to be regarded, in pursuance of paragraph (f), as applied for housing purposes connected with the dwelling.

Paragraph (g) provides that loan moneys used by a taxpayer wholly or principally to acquire a proprietary right in respect of a flat or home unit are to be taken, for purposes of Subdivision C, as applied for housing purposes connected with that dwelling. The meaning that the term "a proprietary right" is to have in the context of the Subdivision is explained in the notes relating to sub-section 82KA(2)(b). Paragraph (g) of sub-section 82KE(2) brings within the scope of the interest deduction scheme loan moneys used to acquire the right to occupy a flat or home unit by acquiring shares in the company that owns the building containing the flat or unit.

Paragraph (h) deals with the use of loan moneys wholly or principally to repay or re-finance an earlier loan that qualified as a housing loan. Replacement loans of this kind are taken to have been applied for housing purposes connected with the relevant dwelling and are able to attract interest deductions.

Sub-section (2) of section 82KE makes it clear that only moneys that are, in terms of sub-section (1), to be taken as having been applied by the taxpayer for housing purposes connected with a dwelling are to be eligible or deductions.

In terms of sub-section (3) of section 82KE, the term "taxpayer" as used in the drafting of sub-section (1) is to be taken as including a reference to a taxpayer and other person.

Section 82KF: Moneys deemed to be lent to a person in certain circumstances.

The provisions contained in this section are designed to ensure that certain taxpayers who incur interest on amounts that they undertake to pay on the acquisition of their home but who do not, strictly speaking, apply loan moneys to acquire their home are brought within the scope of the interest deductions scheme.

Sub-section (1) of section 82KF will enable interest paid by a taxpayer under a contract for the purchase of a home to qualify for interest deductions where the necessary conditions for deduction are satisfied. The purchaser of a dwelling may, for example, pay the vendor a part of the agreed purchase price as a deposit and undertake to pay the unpaid balance of the purchase price, together with interest, by regular instalments over a specified period. Interest paid in these circumstances is not, strictly, an amount paid in respect of loan moneys, but, in terms of sub-section (1), is to be so regarded for the purpose of tax deductions for interest on housing loans. The interest in the property that is acquired or held by the purchaser by reason of the agreement to purchase the dwelling from the vendor is to be taken as a "prescribed interest" in the dwelling under the provisions of sub-section 82KA(2)(a).

Sub-section (2) of section 82KF is to apply where a person becomes liable, or two or more persons become liable jointly, upon acquiring a prescribed interest in land or in a stratum unit or a proprietary right in respect of a flat or home unit to repay an amount secured by a mortgage. For example, the provision would apply where the purchaser of a dwelling takes over from the vendor an existing mortgage secured on the property.

As a result of sub-section (2), the interest deductions scheme will extend to interest payments made in respect of a principal sum that the taxpayer is committed to repay by reason of having taken over from the previous owner a mortgage secured on the home.

Section 82KG: Reimbursement of interest paid on a housing loan.

This section provides that an amount of deductible housing loan interest, if subsequently reimbursed to the taxpayer or to the taxpayer and another person, may be treated as part of the taxpayer's assessable income for the year in which the reimbursement is made. The amount to be treated as assessable income by reason of the reimbursement is to be so much of the amount reimbursed as the Commissioner considers reasonable in the circumstances but is not to exceed the amount allowed as a deduction in respect of the interest. Any determination by the Commissioner on this matter would be subject to the usual rights of objection and appeal.

Sub-clause (2) of clause 17 proposes that the new concession for housing loan interest payments apply to amounts paid on or after 1 July 1974, being interest that became or becomes payable on or after that date.

Clause 18: Certain income to be treated as income from personal exertion.

Sub-clause (1) is consequential upon the proposed surcharge on property income and will re-insert section 95A in the Principal Act. The proposed section provides that a beneficiary's share of the income of a trust estate that was derived from income from personal exertion (e.g., profits distributed from a business carried on by the trustee) will be deemed to be income from personal exertion in the hands of the beneficiary and thus not liable to the surcharge of tax that is payable on income from property.

This amendment will apply in assessments for the income year l974-75 and subsequent years.

Clause 19: Deductions in relation to calculated liabilities.

Introductory Note

Under section 115 of the Principal Act as it applied in relation to the 1973-74 income year, a life assurance company that maintains the "30/20" ratio of public securities in its life assurance assets is allowed a deduction calculated basically by reference to the following formula -

2% of ((value of assets producing assessable income)/(value of total assets)) of (calculated liabilities)


The amount of the basic deduction is increased by 1 per cent for each 1 per cent by which the company's holdings of all public securities exceed 30 per cent, and by one-half per cent for each 1 per cent by which the company's holdings of Commonwealth securities exceed 20 per cent. Thus, if the company's holdings of public securities represent 37.5 per cent of its Australian statutory fund assets and its holdings of Commonwealth securities 25 per cent, the basic deduction is increased by 10 per cent (7.5 per cent + one-half of 5 per cent). Instead of a deduction of 2 per cent the company would be entitled to one of 2.2 per cent.

If a company fails to maintain the "30/20" ratio, the basic section 115 deduction is reduced by 1 per cent for each 1 per cent by which the holdings of public securities are less than 30 per cent, and by one-half per cent for each 1 per cent by which the holdings of Commonwealth securities are less than 20 per cent. The deduction cannot, however, be reduced below 75 per cent of the basic 2 per cent deduction. In other words, the section 115 deduction allowable cannot be less than 1.5 percent of the proportion of calculated liabilities.

By sub-clause (1) of clause 18 it is proposed to reduce the deductions allowable under section 115.

Paragraphs (a), (b), (c) and (d) of sub-clause (1) will, in effect, omit the figure "2" wherever it appears in the numerator of formulae contained in section 115(1). This amendment will reduce by one-half the section 115 deduction - whether it is the basic deduction or the basis (Editor's note: the original says "basis", but the context suggests that "basic" may have been intended) deduction increased or reduced by reference to the extent to which the holdings of public securities exceed or fall short of what is needed to maintain the "30/20" ratio. Thus a company that under existing law is entitled to a 2 per cent deduction will be entitled to one of 1 per cent and a company that would be entitled to a 2.2 per cent deduction if the law were not changed will be allowed a 1.1 per cent deduction.

Turning to paragraph (e) of sub-clause (1) the formula

(3*a*b)/(200*c)


in section 115(1)(c) ensures that the section 115 deduction cannot, under present law, be less than 1.5 per cent, that is, 75 per cent of the basic deduction of 2 per cent. Since the basic deduction is being reduced to 1 per cent it is necessary to amend this formula so that the minimum deduction is reduced in proportion. Paragraph (e) of sub-clause (1) substitutes the formula

(3*a*b)/(400*c)


which will have the result that the section 115 deduction cannot be reduced below 0.75 per cent, that is, 75 per cent of the proposed basic deduction.

By sub-clause (2) the amendment made by sub-clause (1) is to apply in assessments for the 1974-75 year of income and subsequent years.

Clause 20: Co-operative companies.

A company qualifies for assessment as a co-operative company where it satisfies the criteria laid down in sections 117 and 118 of the Principal Act. Stated very broadly, a co-operative company is one that has been established with the primary object of acquiring commodities or animals for or from its shareholders, or of providing specified services to them. It is a condition of co-operative tax status that at least 90 per cent of the company's business be transacted with its own shareholders.

A company that satisfies these criteria is by virtue of section 120 of the Principal Act, entitled to a deduction in its assessment for so much of its assessable income as is distributed among its shareholders or, in the case of a co-operative company mainly engaged in the marketing of commodities or animals acquired from its shareholders, is applied in the repayment of certain government loans. A co-operative company is also subject to tax at a concessional rate on so much of its taxable income as does not exceed $10,000.

In former years, some credit unions have, by reason of their functions of providing services to their members, been able to qualify as co-operative companies under the income tax laws. However, the amendment proposed by clause 6 will effectively free from tax the income derived by a credit union by way of interest paid by members on loans and advances made by them. As a result, the assessable income of credit unions, as from the 1973-74 income year, will generally be restricted to that derived from investments and other "outside" activities.

In these circumstances, it is proposed by clause 20 to amend section 117 of the Principal Act to exclude from the range of companies entitled to co-operative tax status a company that qualifies for the exemption of income under proposed section 23G - the new provision to be enacted by Clause 6 of the Bill.

Sub-clause (1) of clause 20 proposes the insertion in section 117 of the Principal Act of a new sub-section - sub-section (2) - which will provide that a company that, in relation to a year of income, is an approved credit union for the purposes of section 23G is not a co-operative company in relation to that year of income.

Sub-clause (2) of clause 20 provides, consistently with sub-clause (2) of clause 6, that the amendment to section 117 will apply to assessments in respect of 1973-74 and subsequent years of income.

Clauses 21 to 29: Capital expenditure on prospecting and mining for minerals other than petroleum.

Introductory Note

The general scheme of Division 10 of the Principal Act is to authorise deductions on special bases for capital expenditure incurred by a mining enterprise in connexion with the carrying on of mining operations upon a mining property. Expenditures on plant, development of a mining property and housing and welfare facilities for mine employees and their families are within the scope of expenditures covered. The Division also deals with deductions for expenditures on prospecting and exploration.

In broad terms, capital expenditure eligible for deduction under Division 10 includes -

•

expenditure in carrying on mining operations on a mining property for the extraction of minerals (including the preparation of a site for such operations) and on buildings, other improvements and plant which are necessary for such operations;

•

expenditure in providing, or contributing to the cost of providing, water, light, power, access roads or communications to the site of the extractive mining operations;

•

expenditure on buildings and plant for use in cleaning, leaching, crushing, grinding, breaking, screening, grading or sizing of minerals and for use in concentration of minerals by a gravity, magnetic, electrostatic or flotation process;

•

expenditure on buildings or other improvements for use directly in connexion with the storage of minerals and products of the treatment of minerals in relation to the operation of the plant referred to above;

•

expenditure of formation and incorporation, under-writing costs and other capital raising expenses of companies whose principal business is the carrying on of prescribed mining operations or (e.g. as a company interposed between investors and a mining company) providing capital to a company engaged principally in such operations;

•

subject to certain limits, expenditure incurred in acquiring a mining or prospecting right or mining or prospecting information up to an amount specified in a notice given to the Commissioner by the parties to the transaction;

•

the cost of providing housing and welfare facilities at, or at a place adjacent to, the mine site for the mine employees and their dependants;

•

expenditure on exploration or prospecting for minerals obtained by mining operations.

Deductions under Division 10 are not, however, available for capital expenditure incurred in relation to -

•

plant used for sintering or calcining or for the production of, or processes carried on in connexion with the production of alumina, or of pellets or other agglomerated forms of iron;

•

ships, railway rolling stock or road vehicles, or railway lines, roads, pipe-lines or other facilities for the transport of minerals or products of minerals, other than transport wholly within the site of extractive mining operations;

•

plant, buildings or other improvements for use in connexion with, or works carried out in connexion with, the establishment, operation or use of a port;

•

an office building that is not situated at or adjacent to the site of extractive mining operations.

With one minor exception relating to company formation and capital raising expenditures the amendments proposed to be made to Division 10 will not change the classes of capital expenditure which may qualify for deduction and the classes of expenditure which lie outside the scope of the Division. The amended provisions will, however, substantially alter the bases on which deductions may be allowed for eligible capital expenditures.

As the Division now applies, expenditures other than expenditure on exploration or prospecting covered by Division 10 may be deducted on any one of several different bases, at the option of the mine-owner -

(i)

annual deductions (of not less than one-twenty-fifth of the undeducted expenditure) based on the estimated life of the mine;

(ii)

an outright deduction for expenditure, other than on housing and welfare, in the year in which it is incurred;

(iii)

an immediate deduction for income appropriated for capital expenditure other than on housing and welfare;

(iv)

annual allowances by way of depreciation of plant;

(v)

deductions spread over a period of 5 years for expenditure on housing and welfare.

Expenditure on exploration and prospecting is at present deductible in the year it is incurred, up to the amount of net income earned from a mining business. The balance is allowable as deductions over the life of the mine.

In relation to capital expenditures to which the Division applies, other than expenditure on exploration or prospecting, it is proposed by the Bill to withdraw options (ii), (iii) and (v) listed above, subject to certain transitional arrangements, discussed later in these notes, in respect of expenditures incurred or contracted for prior to 18 September 1974. The withdrawal of these options will mean that all allowable capital expenditure (other than exploration expenditure) will, in future be deductible by reference to the estimated life of the mine to which the expenditure relates, or, in the case of expenditure on plant, as depreciation allowances if the taxpayer so elects.

As mentioned earlier, the exploration and prospecting expenditure of general mining enterprises is deductible in the year in which it is incurred, up to the level of the net income derived from a mining business in that year, any expenditure in excess of that being allowable as deductions over the life of the mine.

Under the proposed amendments, exploration and prospecting expenses will continue to be immediately deductible against the net mining income of the year in which the expenditure is incurred. However, where amounts expended on exploration exceed the net mining income of the year of expenditure, the excess will be allowable as a deduction against the net mining business income (including income from associated activities) of the taxpayer in the next year in which such income is derived. If the income of that next year is insufficient to offset all of the excess expenditure, the balance will be carried forward for deduction successively against the net mining income of the subsequent year or years.

The adjusted basis for allowing deductions for exploration and prospecting expenditure will apply in relation to expenditure incurred in the 1974-75 income year and subsequent years.

Explanations of the amendments proposed to Division 10 by each clause follow.

Clause 21: Interpretation.

Section 122 of the Principal Act, which contains definitions of terms and explanations of certain references used in Division 10 to facilitate drafting and interpretation, is to be amended by this clause.

Sub-section 122(3) provides for a situation where a taxpayer carries on prescribed mining operations on two or more mining properties. In such a case the relevant provisions of Division 10 are applied to each of these properties as if it were the only property on which the taxpayer is so engaged. For this purpose, any amounts of expenditure or any other amounts that relate to two or more of the properties is apportioned in a reasonable manner. For example, there may be a crushing plant or other eligible plant used to treat ores from two separate mining properties operated by the one taxpayer. The cost of the plant is apportioned between the two properties for the purpose of calculating the deductions allowable under Division 10 in respect of each property.

Clause 21 will effect a purely technical amendment to sub-section (3) to spell out with greater precision its scope of operation. It will make it clear that exploration or prospecting expenditure allowable as a deduction under section 122J of the Principal Act is not required to be apportioned between two or more properties in calculating the amount of expenditure that may be allowed as a deduction in a particular year of income.

The clause will also add new sub-sections (4) and (5) to provide for the case where a taxpayer disposes of a mining or prospecting right or mining or prospecting information and is a party to a notice given to the Commissioner of Taxation under section 122B. The broad effect of such a notice is to entitle the purchaser to deductions over the life of the relevant mine for the amount duly specified in the notice, while a corresponding reduction is made in the deductions otherwise available to the vendor.

Sub-section (4) will provide for the case where an amount specified in a notice under section 122B exceeds the amount that may validly be specified under that section. In such circumstances, section 122B provides that the amount specified is to be deemed to be the amount actually specified less the excess. Sub-section (4) provides that in such a case any reference in Division 10 to an amount specified in a notice is to be read as a reference to the reduced amount, that is, to the amount deemed to have been specified.

Sub-section (5) will ensure that the amount specified in a notice under section 122B is identified as expenditure incurred by the vendor so that the appropriate adjustments may be made to the deductions otherwise available to the vendor.

Clause 22: Allowable capital expenditure.

Section 122A of the Principal Act specifies categories of capital expenditure that qualify for or are excluded from deduction under Division 10.

The section is, in effect, an expanded definition of "allowable capital expenditure". A general test that applies to all the categories of capital expenditure that qualify for deduction is that the expenditure must be incurred by a person who is engaged in, or preparing to engage in, prescribed mining operations.

Sub-section (1) of section 122A specifies the particular classes of expenditure that may qualify as allowable capital expenditure and these classes have been indicated in broad outline in the introductory notes on the proposed changes to Division 10.

Clause 22 proposes to insert a new sub-section (1A) in section 122A so as to withdraw from the categories of allowable capital expenditure, expenditure of the kind included in paragraph (e) of sub-section (1).

By paragraph (e), the allowable capital expenditure of a company which is carrying on, or which proposes to carry on, as its sole or principal business, prescribed mining operations or the provision of capital (whether by capital subscription or otherwise) to such a company, includes -

•

expenditure in respect of the formation and incorporation of the company; and

•

so much of the expenditure incurred by the company in issuing, or making calls on, shares as the Commissioner of Taxation considers reasonable having regard to the amount of the moneys paid on those shares that are expended on mining or prospecting outgoings.

The proposed new sub-section (1A) will remove from paragraph (e) company formation and capital raising expenses etc that are incurred after 17 September 1974, the day on which the proposed amendment to this effect was announced. As a transitional measure, however, sub-section (1A) provides for expenditure of this kind incurred between 17 September 1974 and 30 June 1976 to remain eligible for inclusion in allowable capital expenditure if it is incurred in pursuance of a contract that was entered into on or before 17 September 1974.

Clause 23: Residual capital expenditure.

This clause is a formal drafting measure which does not change the practical operation of Division 10. It proposes to amend section 122C of the Principal Act to achieve drafting consistency with a corresponding provision to be inserted in section 124AC of the proposed new Division 10AA to be substituted by this Bill.

Section 122C provides the basis for determining the amount of the "residual capital expenditure" of a taxpayer as at the end of a year of income. The amount so determined as at the end of any income year is available for deduction over the estimated life of the mine or proposed mine to which it relates.

In broad terms, the residual capital expenditure is so much of the allowable capital expenditure incurred by a taxpayer up to the end of a year of income as has not been allowed as a deduction in a previous year of income.

Sub-section (1) of section 122C prescribes the amounts to be taken into account in order to ascertain the residual capital expenditure as at the end of a year of income. Paragraphs (c) to (g) of the sub-section provide for certain amounts to be excluded from the residual capital expenditure. Under the redrafted sub-section (1) as proposed by paragraph (a) of clause 23, the provisions of paragraphs (c) to (g) will be regrouped within new paragraphs (c) and (d). The principal advantage of the change will be clarification of the adjustments to be made to residual capital expenditure for expenditure on property that is disposed of, lost or destroyed or is no longer used for prescribed purposes and for amounts specified in notices under section 122B. (The practical effect of a notice under section 122B is, in very broad terms, to transfer to the purchaser of a mining or prospecting right or mining or prospecting information the entitlement of the vendor to have the relevant expenditure deducted over the life of the mine.)

Paragraph (b) of clause 23 is a drafting measure to bring up to date a reference in sub-section 122C(2) to take account of the rearrangement proposed by paragraph (a) of the clause.

Clause 24: Deduction of expenditure.

Section 122D of the Principal Act authorises the allowance of deductions for residual capital expenditure over the life of the mine.

Sub-section (1) provides that where a taxpayer has an amount of residual capital expenditure as at the end of a year of income, a deduction is allowable in accordance with section 122D.

Sub-section (2) provides that the deduction for any year is ascertained by dividing the amount of the residual capital expenditure as at the end of the year by the lesser of the number of years in the estimated life of the mine as at the end of the year of income and twenty-five.

Where a taxpayer has more than one mine on a mining property, the sub-section provides that the calculation of the deduction allowable for the residual capital expenditure is to be made on the basis of the estimated life of the mine with the longer or longest estimated life, as the case may be.

Provision is also made to meet the situation where a taxpayer has undertaken preparatory work such as clearing the mine site and installing light and power but has not commenced the actual extractive mining operations. In such a case, the deduction is determined by relating the expenditure to the estimated life of the proposed mine.

Where a taxpayer carries on, or proposes to carry on, prescribed mining operations on two or more mining properties a separate amount of residual capital expenditure is ascertained for each property. The deductions allowable under section 122D are then determined for each property on the basis of the estimated life of the mine on that property.

Under the present terms of the law the annual estimates of the life of a mine or proposed mine for the purpose of calculating the amount to be allowed as a deduction under section 122D are made by the taxpayer carrying on the mining operations. It is not proposed to change that basic situation. It is, however, proposed to make it clear that the estimate applies for the determination of tax liabilities only if it is reasonably made.

To this end, clause 24 proposes the insertion in section 122D of a new sub-section (5) which will permit the Commissioner of Taxation to substitute his own estimate of the life of a mine or proposed mine if he is not satisfied that the estimate made by the taxpayer is realistic and soundly based.

Where he exercises his proposed power under sub-section (5), the Commissioner will be required to have regard to any relevant information in his possession and would, of course, be expected to be guided by expert technical advice in forming his estimate. Any estimate made in these situations would be open to review by a Board of Review in the usual way.

Clause 25: Election to deduct expenditure in year in which incurred.

As indicated earlier in these notes, it is intended by the Bill to withdraw the options at present available to general mining companies to elect to be allowed deductions on special bases for allowable capital expenditure, for expenditure on housing and welfare and for amounts appropriated out of income to provide for future allowable capital expenditure. Expenditure so affected will, in future, be deductible under section 122D on a "life-of-mine" basis.

The amendments to give effect to this intention are contained in clauses 25 to 27 of the Bill. Clause 25 will terminate the option under section 122E of the Principal Act by inserting two new sub-sections - sub-sections (3) and (4) - in that section.

Under section 122E, a person who has incurred allowable capital expenditure may elect to claim a deduction for all or part of that expenditure in the year in which it is incurred in lieu of claiming deductions spread over the estimated life of a mine. A taxpayer may elect that section 122E shall apply in respect of allowable capital expenditure, other than expenditure on housing and welfare or on the purchase of a mining or prospecting right or mining or prospecting information.

Sub-section (3) will provide that a deduction under section 122E will not be allowable in respect of allowable capital expenditure incurred after 17 September 1974 unless the expenditure is incurred under a contract made on or before that date for the acquisition of property by, or for the performance of work for, the taxpayer.

Sub-section (4) will provide that a deduction under section 122E will not in any event be allowable in respect of any expenditure incurred after 30 June 1976. Irrespective of the date on which a contract for the expenditure was made, expenditure incurred after 30 June 1976 will be outside the scope of the allowance.

The proposed amendments to section 122E will not affect entitlements to deductions in respect of expenditure incurred on or before 17 September 1974. Nor will they affect entitlements to deductions in respect of expenditure incurred between 18 September 1974 and 30 June 1976 pursuant to a contract entered into on or before 17 September 1974.

Clause 26: Election to deduct expenditure on housing and welfare over 5 years.

This clause will withdraw the option provided by section 122F of the Principal Act in relation to expenditure on housing and welfare.

Housing and welfare is defined in section 122 of the Principal Act. Broadly, it covers accommodation and welfare facilities provided at, or at a place adjacent to, the site of extractive mining operations for employees of the taxpayer working on that site, and for dependants of those employees. Under the present law, a taxpayer who incurs allowable capital expenditure on housing and welfare had the choice of having the expenditure deducted over the life of the mine or of electing that section 122F apply to allow deductions over a period of five years.

Sub-section 122F(1) provides that where a taxpayer has incurred allowable capital expenditure on housing and welfare during an income year in relation to a mining property, he may elect that section 122F apply to the whole of that expenditure. A taxpayer is not permitted to elect that this section apply in respect of part only of expenditure on housing and welfare incurred in an income year for a particular mining property. However, where he has two or more mining properties, he may elect to have section 122F applied to the expenditure in respect of only one, or some of those properties.

The option available under this section is to be withdrawn by the insertion of new sub-sections (4) and (5).

Proposed sub-section (4) provides that section 122F will not apply in respect of expenditure on housing and welfare incurred after 17 September 1974 unless the expenditure is incurred pursuant to a contract entered into on or before that date for the acquisition of property by, or the performance of work for, the taxpayer in respect of the provision of housing and welfare.

Proposed sub-section (5) provides that a deduction under section 122F will not be allowable in respect of housing and welfare expenditure incurred after 30 June 1976 regardless of when the contract for the expenditure was entered into.

Section 122F will continue to apply to allow deductions over 5 years for housing and welfare expenditure incurred on or before 17 September 1974 and to expenditure incurred after 17 September 1974 and on or before 30 June 1976 pursuant to a contract made on or before 17 September 1974.

Clause 27: Deductions of appropriations.

The main purpose of this clause is to withdraw the option provided by section 122G of the Principal Act which permits a taxpayer to elect to have a deduction allowed in respect of an amount of income appropriated for allowable capital expenditure which is not expended during the year of income and in respect of which the appropriation is made. For the purposes of this section, allowable capital expenditure does not include expenditure on housing and welfare or the cost of acquiring a mining or prospecting right or mining or prospecting information.

A person carrying on prescribed mining operations who appropriates income to be expended as allowable capital expenditure, may elect to have section 122G applied to so much of the amount appropriated as is not expended in the year in which the appropriated income is derived. An appropriation of income may be made during the year in which the income is derived or within two months after the end of that year, or within such further time as the Commissioner allows. An appropriation may, therefore, be made after the end of the income year in which the income appropriated is derived, e.g. when the accounts for the year are being completed.

Sub-section 122G(3) is the operative provision. It authorises a deduction of the unexpended amount of an appropriation, the deduction being available against the assessable income of the income year in which the appropriated income was derived. The deduction is limited to so much of the amount of the appropriated income as the Commissioner is satisfied will be, or is likely to be, expended as allowable capital expenditure by the end of the income year next succeeding the year of income in respect of which the appropriation is made.

Where a deduction has been allowed in a year of income for an appropriation of income, an equivalent amount is included in the assessable income of the next succeeding year. The amount so included in assessable income is, in effect, offset by the deduction for allowable capital expenditure actually incurred in that next year.

A further amendment proposed to section 122G is to have effect in relation to the transitional period for which the section is, as discussed below, to continue to apply. The further amendment is consequential on the proposed repeal, by clause 5, of section 23A of the Principal Act. Both amendments are to be achieved by omitting present sub-section 122G(5) and substituting a new sub-section 122G(5) in its place.

Sub-section 122G(5) at present has effect where an election under section 122G is made by a taxpayer who derives income to which section 23A applies. As mentioned in the notes to clause 5, the broad effect of section 23A is to exempt 20 per cent of the net income derived from mining in Australia or Papua New Guinea for prescribed metals or minerals.

With the proposed repeal of section 23A with effect in relation to years of income subsequent to 1973-74, the technical provisions of section 122G(5) cannot have application in assessments of years subsequent to the 1974-75 income year. Accordingly, a transitional provision proposed in clause 44 will retain the operation of the present sub-section (5) in relation to an amount required to be included as assessable income of the 1974-75 income year following a deduction for an appropriated amount allowed in the 1973-74 income year against income that was partially exempt under section 23A.

The main purpose of clause 27 - to terminate the concession authorised by section 122G - is to be achieved by inserting a new sub-section (5).

Paragraph (a) of the new sub-section is to provide that a deduction will not be allowable under section 122G for an amount appropriated out of income derived by a taxpayer after the 1974-75 income year. In no case will a deduction be allowable under the section for an amount appropriated from income derived in the 1975-76 or later income years.

Paragraph (b) will further provide that a deduction is not to be allowable under section 122G for an amount appropriated out of income derived before or during the 1974-75 income year if the appropriation is made by the taxpayer after 17 September 1974. An exception to this general application of the withdrawal of section 122G is to be provided, however, for a transitional period in accordance with new sub-paragraphs (5)(b)(i) and (ii).

Those sub-paragraphs will operate to retain eligibility for deduction under section 122G of an amount appropriated after 17 September 1974 out of income derived before or during the 1974-75 income year if two conditions are met -

•

firstly, that the appropriation is made to provide for allowable capital expenditure incurred by the taxpayer before 1 July 1976. In a case where the expenditure has yet to be incurred, the Commissioner is required to be satisfied that the expenditure for which the appropriation provides will be incurred before 1 July 1976;

•

secondly, that the allowable capital expenditure or expected expenditure that is provided for by the appropriation has been (or will be) incurred under a contract made on or before 17 September under which property was to be acquired by, or work was to be done for, the taxpayer.

The amendments will not disturb the entitlement to deductions under section 122G of amounts appropriated at any time on or before 17 September 1974 or of appropriations made after that date where the exemption conditions of paragraph (b) are met.

Clause 28: Exploration and prospecting expenditure.

This clause proposes to amend section 122J of the Principal Act.

Section 122J, as mentioned earlier in these notes, provides that expenditure incurred by a taxpayer on exploration or prospecting on any mining tenements in Australia or Papua New Guinea for minerals obtainable by prescribed mining operations shall be an allowable deduction. By virtue of the definition of "prescribed mining operations" in section 122, section 122J does not apply to exploration or prospecting expenditure incurred in searching for gold, the income from which is exempt. Nor does the section apply to such expenditure incurred in searching for petroleum as deductions are provided for the costs of petroleum exploration in Division 10AA of the Principal Act.

"Exploration or prospecting" is defined in sub-section 122J(6) and includes any one or more of the following:

•

geological mapping, geophysical surveys, systematic search for areas containing minerals and search by drilling or other means within those areas; and

•

search for ore within or in the vicinity of an ore-body by drives, shafts, crosscuts, winzes, and drilling.

The definition does not extend to normal mining operations which are directed towards the extraction of minerals as opposed to the discovery of mineral deposits.

The deduction under section 122J is limited to a taxpayer who is carrying on a mining business (other than a business of mining for petroleum). It is also limited under sub-section (2) to so much of the taxpayer's assessable income from that business and from activities associated with that business as remains after deducting all other deductions relating to that income including deductions allowable under other provisions of Division 10.

The main purpose of the amendments proposed by clause 28 is to modify the operation of section 122J where eligible expenditure on prospecting or exploration incurred in a year of income exceeds the net assessable income derived from a mining business in that year.

Under the present law, sub-section 122J(3) governs the tax treatment of so much of exploration or prospecting expenditure incurred by a taxpayer in the income year as exceeds the deduction allowable in that year, having regard to the limitation imposed by sub-section (2). Sub-section (3) deems the excess to be allowable capital expenditure incurred by the taxpayer in the first subsequent year of carrying on mining operations and provides for the excess to be deductible over the life of the mine in accordance with section 122D.

Where a taxpayer does not carry on prescribed mining operations for some years after incurring expenditure to which section 122J relates, any excess arising under the section can be carried forward indefinitely until such operations are commenced.

Alternatively, the unrecouped exploration or prospecting expenditure (other than expenditure on plant) may be taken into account for the purposes of section 122B of the Principal Act if the taxpayer sells a mining or prospecting right or mining or prospecting information. In these circumstances, the taxpayer and the purchaser of the right or information may give a notice to the Commissioner specifying that an amount of the consideration for the sale, up to the amount of the unrecouped exploration or prospecting expenditure, is to be treated as allowable capital expenditure of the purchaser. The practical effect of the notice is to transfer to the purchaser the entitlement of the taxpayer to have the expenditure deducted over the life of the mine.

Paragraph (a) of clause 28 proposes an amendment to sub-section 122J(3) to preserve the present basis of deduction of excess exploration expenditure for expenditure incurred up to and including the 1973/74 income year.

Paragraph (b) of clause 28 proposes to omit sub-section 122J(4) and substitute two new sub-sections - sub-sections (4) and (5). The proposed new sub-section (4) will provide a different basis for allowing deductions for an amount of exploration or prospecting expenditure incurred in excess of the amount immediately deductible in the year in which it is incurred because of the limit imposed by sub-section (2).

New sub-section (4) will apply so as to treat the excess amount for the purposes of sub-section (1) of the section as being incurred in the first subsequent year of income in which the taxpayer carried on prescribed mining operations. This will effectively throw the excess amount to be allowed as a deduction against any net assessable income derived from a mining business in that subsequent year. Where there is no such amount of income derived in the subsequent year, or where the net mining income of that year is insufficient to absorb the whole of the excess amount, the undeducted balance will, until exhausted, be carried forward for deduction successively against the net assessable income from mining derived in subsequent years. The new sub-section (4) will apply in relation to expenditure incurred in the 1974/75 income year and subsequent years.

The effect of the amendment will, in most cases, be to permit deductions for excess exploration expenditure to be allowed earlier than under the present basis.

New sub-section (5) which is effectively a restatement of the present sub-section 122J(4) is directed to the case where the whole or part of an excess amount referred to in sub-section (3) or (4) is to be taken into account under section 122B to determine the amount to be included in the allowable capital expenditure of a purchaser of a mining or prospecting right or information. To ensure that neither the vendor nor any subsequent purchaser of the mining or prospecting right or information from the vendor becomes entitled to a deduction for that same amount, sub-section (5) provides that -

•

sub-section (3) or (4) shall not operate to deem so much of the excess amount as has been taken into account under section 122B to be allowable capital expenditure of the vendor; and

•

so much of the excess amount as has been taken into account for the purpose of section 122B shall not be available to any subsequent purchaser of a mining or prospecting right or information from the vendor.

Clause 29: Recoupment of expenditure.

This clause proposes the insertion into Division 10 of a new section - section 122T - which will have the effect of excluding from the classes of capital expenditure that qualify for the special deductions provided under the Division any amounts of capital expenditure for which the taxpayer has been recouped, or is entitled to be recouped, where the amount of the recoupment is not, and will not be, included in the taxpayer's assessable income.

It will make clear that, where deductions under the Division have already been allowed in respect of capital expenditure, appropriate authority will be provided to disallow the deductions in the event that the taxpayer later becomes entitled to be recouped for all or part of the expenditure.

The provision to achieve this result is to be provided by sub-section (1) of the proposed new section and will apply to recoupments by the Australian or a State government or authority or by any person or company.

A complementary amendment is to be made to section 170 of the Principal Act by clause 39 to give the Commissioner the necessary power to amend income tax assessments. A separate note is provided for that clause.

New sub-section (2) will give to the Commissioner of Taxation power to determine, for the purpose of the section, the extent to which an amount received or entitled to be received by a taxpayer constitutes a recoupment of capital expenditure. This provision will apply where, for example, one global sum is paid to the taxpayer in settlement of a number of claims, including a claim for recoupment of capital expenditure, and specific amounts have not been allocated to each claim in determining the total sum paid.

Clauses 30 to 32: Division 10AAA - Transport of certain minerals.

Introductory Note

As mentioned earlier in this memorandum, the Bill proposes to effect amendments to provisions contained in Division 10AAA of the Principal Act which, in broad terms, authorises the allowance of special deductions over a 10 year period for capital expenditure incurred on a railway, road, pipeline or other facility for transporting minerals, including petroleum, mined in Australia or Papua New Guinea for the purpose of producing assessable income. Notes on each of the clauses amending Division 10AAA follow.

Clause 30: Application of Division.

Section 123A of the Principal Act specifies the circumstances in which capital expenditure may qualify for the special deductions authorised by Division 10AAA and quantifies that expenditure for the purposes of the deductions.

Sub-section 123A(1) states that capital expenditure on transport facilities is, subject to certain exclusions provided for in the sub-section, eligible for the special deductions where the following conditions are met:-

•

the expenditure has been incurred on or after 1 July 1961;

•

the expenditure has been incurred on, or by way of contribution to expenditure by another person on, a railway, road, pipeline or other transport facility;

•

the railway, road, pipe-line or other facility has been constructed or acquired for use primarily and principally for the transport -

(a)

of minerals obtained from the carrying on by any person of prescribed mining operations; or

(b)

of processed materials produced from such minerals,

other than transport wholly within the site of prescribed mining operations; and

•

the specified transport facility is to be used in carrying on a business for the purpose of gaining assessable income.

It is not necessary that the expenditure on a transport facility be incurred by the mine-owner who is producing the minerals or products of minerals transported.

The amendments proposed by this clause will omit present sub-section (2) of section 123A and substitute new sub-sections (2) and (3).

The present sub-section (2) provides for a reduction of the amounts to which the special deductions may apply by excluding any amount of capital expenditure for which the taxpayer has been recouped, or is entitled to be recouped, where the amount of the recoupment is not, and will not be, included in the taxpayer's assessable income.

The new sub-section (2) will extend this provision to meet the situation where a deduction for expenditure is allowed before any entitlement to be recouped has arisen. In this event, authority is to be provided for some or all of the deduction previously allowed to be disallowed to take into account the subsequent entitlement to recoupment.

This amendment will bring the section into line with the proposed treatment of recoupments of expenditure for the purposes of Division 10 to be provided for by the previous clause. Similar recoupment provisions are to be inserted in Division 10AA in relation to prospecting and mining for petroleum by clause 33.

See also the notes on clause 39 in relation to the complementary amendment to section 170 of the Principal Act which governs the authority of the Commissioner to amend income tax assessments.

Clause 31: Deduction of expenditure.

Section 123B is the operative provision of Division 10AAA and authorises the allowance of deductions at the flat rate of 10 per cent per annum of the capital expenditure qualifying for the special deductions under section 123A. The deduction is dependent upon the transport facility being used primarily and principally for a purpose referred to in section 123A. If this test is met, a deduction of one-tenth of the capital expenditure to which the Division applies is, under sub-section 123B(1), allowable in the first year of income in which the facility is so used and in each of the next succeeding 9 years.

By this clause it is proposed to substitute a new sub-section for the present sub-section (1) to extend to 20 years the standard period over which deductions are to be allowed for capital expenditure qualifying for deductions.

Paragraph (a) of new sub-section (1) will effectively retain eligibility for the existing 10 year write-off period for capital expenditure incurred on or before 17 September 1974 - the date on which the proposed changes to Division 10AAA were announced. As a transitional measure, it will also authorise retention of the 10 year spread of deductions for any capital expenditure incurred between 17 September 1974 and 30 June 1976 under a contract made on or before 17 September 1974. The 10 year period commences with the income year in which the transport facility is first used primarily and principally for a purpose referred to in section 123A.

Paragraph (b) applies the proposed 20 year period of write-off to capital expenditure incurred after 17 September 1974 other than expenditure incurred between 17 September 1974 and 30 June 1976 which satisfies the requirements for application of the transitional arrangements referred to above.

5 per cent of expenditure falling within paragraph (b) will be allowable as a deduction in the first income year in which the transport facility comes into use for eligible purposes and a further 5 per cent will be allowable as a deduction from assessable income in each of the following 19 years.

Clause 32: Election in relation to certain expenditure

This clause proposes to insert a new section - section 123BA - into Division 10AAA as a consequence of the amendment proposed by the previous clause to increase from 10 to 20 years the basic period over which expenditure on a mineral transport facility may be deducted. The new section 123BA will have effect in relation to expenditure which, under the transitional arrangements contained in section 123B, would retain eligibility for deduction over 10 years. It will permit a taxpayer to elect, in respect of so much of the expenditure as has not been allowed and is not allowable in assessments for years of income prior to the 1974-75 income year (or the 1973-74 income year for some taxpayers adopting substituted accounting periods), to spread deductions for the balance of expenditure on the transport facility over a period equal to 20 years as reduced by the number of earlier years in which deductions have been allowed or are allowable.

Sub-section (1) of section 123BA identifies the capital expenditure in relation to which an election may be made, namely, capital expenditure incurred on or before 17 September 1974 or incurred between 17 September 1974 and 30 June 1976 under a contract made on or before 17 September 1974 under which property was to be acquired by, or work was to be performed for, the taxpayer in respect of capital expenditure on the transport facility.

Sub-section (2) provides that an election under the section must be in writing signed by or on behalf of the taxpayer.

The sub-section also specifies the times within which an election is required to be lodged with the Commissioner of Taxation. The specified times are -

•

In the case of an election in relation to expenditure incurred before the end of the year of income of the taxpayer in which 17 September 1974 occurred - on or before the last day for the furnishing of the return of income for that year; and

•

in the case of an election in relation to expenditure incurred in a later year of income - on or before the last day for the furnishing of the return of income of the income year during which the expenditure was incurred.

The reference to the return of the year of income of the taxpayer "in which 17 September 1974 occurred" is designed to cover cases where particular taxpayers have obtained approval to balance their accounts for income tax purposes on dates other than 30 June each year. For taxpayers whose returns of income cover the normal year ending on 30 June, the reference will relate to the return of the 1974-75 income year. For some taxpayers who have been permitted to adopt substituted accounting periods, however, the reference will relate to the return of income for 1973-74 (e.g. for a taxpayer who balances late on 30 November in lieu of 30 June each year).

An extended time for lodgment of an election under section 123BA may be granted by the Commissioner.

Sub-section (3) of proposed section 123BA is the operative provision. Paragraph (a) of the sub-section deals with cases where part of the expenditure in respect of which an election is made has been allowed or is allowable as a deduction or deductions in years of income prior to the income year of the taxpayer in which 17 September 1974 occurred (for most taxpayers this means prior to the 1974-75 income year). Paragraph (a) provides the basis on which the remainder of the expenditure is to be allowed as deductions.

In effect, paragraph (a) provides for the remainder to be allowed as deductions in equal annual instalments spread over a period calculated by reference to the standard 20 years as reduced by the number of years of income, prior to the income year in which 17 September 1974 occurred, in which deductions for expenditure on the transport facility have been allowed or are allowable to the taxpayer.

The first instalment as calculated under the paragraph is allowable as a deduction from the assessable income of the income year of the taxpayer in which 17 September 1974 occurred - as explained, for most taxpayers this would be the 1974-75 income year - and the remaining instalments are allowable successively over succeeding income years until the remainder of the expenditure is exhausted by the deductions.

Paragraph (b) deals with cases where no part of the expenditure covered by an election has been allowed or is allowable in years of income of the taxpayer in which 17 September 1974 occurred. This will be the case, for example, where the transport facility does not commence to be used for eligible purposes until after the end of that income year. Another example would be where expenditure covered by an election is incurred after the end of that income year and before 30 June 1976 under a contract made on or before 17 September 1974.

In these cases, paragraph (b) authorises the allowance of deductions for the expenditure in equal annual instalments over 20 years commencing with the first year of income of the taxpayer in which the facility is used primarily and principally for the transport of minerals or mineral products within the meaning of section 123A.

Sub-section (4) of new section 123AB is a drafting measure to facilitate the operation of sub-section (3). It contains definitions of two expressions "the prescribed fraction" and "the prescribed number" used in paragraph (a) of sub-section (3), the operation of which has been explained above.

Sub-section (5) is a technical measure to ensure that section 123B(2) applies in relation to deductions under section 123BA as well as to deductions under section 123B which, as previously explained, is the main provision authorising the allowance of deductions under Division 10AAA.

Broadly, sub-section 123B(2) provides that a deduction is not allowable under section 123B where there is a disposal, loss or destruction of property expenditure on which is deductible under Division 10AAA or where such property ceases to be used primarily and principally for the transport of minerals and products of minerals. In these circumstances, an annual deduction is not allowable in the year in which the disposal, loss or destruction, or the cessation of use, occurred or in any succeeding income year.

Instead, any adjustment by way of undeducted capital expenditure, or of a recoupment of over-deductions, is effected under the provisions of section 123C of the Principal Act.

Clause 33: Division 10AA: Prospecting and Mining for Petroleum.

Introductory Note

This clause proposes the repeal of Division 10AA of the Principal Act and the insertion of a new Division 10AA.

The general scheme of Division 10AA of the Principal Act, which is to be repealed, is to authorise special deductions for capital expenditure incurred in prospecting or mining for petroleum in Australia or Papua New Guinea. These deductions are allowable from income derived by a taxpayer from the sale of petroleum produced by the taxpayer in Australia or Papua New Guinea and products of that petroleum. The general effect of the present law is to free the proceeds from the sale of petroleum from Australian tax until the allowable capital expenditure has been fully recouped.

The proposed new Division 10AA will apply to the same range of capital expenditures as the present Division with the exception of company formation and capital raising costs which will not be allowable as deductions under the proposed new Division. The new Division provides for the continuation of the present scheme under which these special deductions are allowable only against petroleum mining income. The allowance of immediate deductions against petroleum mining income of petroleum exploration expenditure will also be continued under the proposed new Division.

The amendments proposed will vary the basis on which deductions are allowed for capital expenditure incurred in acquiring a petroleum prospecting or mining right or in carrying on petroleum mining operations. Under the present law these deductions are available immediately against petroleum mining income. Under the new Division, these expenditures will be deductible over the estimated life of the petroleum field (at a minimum rate of 4 per cent a year on the reducing balance) or, in the case of plant, as normal depreciation if the taxpayer so elects.

The proposed new Division contains provisions that will preserve to a taxpayer any entitlements he may have to deductions under the existing law in respect of capital expenditures incurred prior to 18 September 1974 or incurred on or after that date and before 1 July 1976 in pursuance of contracts made prior to 18 September 1974, being contracts under which property was to be acquired by, or work was to be performed for, the taxpayer.

Explanations of each of the sections in the proposed new Division 10AA follow.

Section 124: Interpretation.

Sub-section (1) of this section contains definitions of terms used in the Division to facilitate drafting and interpretation.

"Australia" is defined as including Papua New Guinea. This new Division will apply, as its predecessor did, in respect of petroleum exploration and mining operations in Papua New Guinea.

"net exempt income from petroleum": This term will mean the amount remaining after deducting from the exempt income from petroleum derived by a taxpayer during a year of income all expenses (other than expenses of a capital nature) incurred in gaining or producing that income. Any taxes paid during an income year in respect of exempt income from petroleum derived during that year or a preceding income year is deductible in ascertaining the amount of the net exempt income from petroleum.

"prescribed petroleum operations": The operations falling within this term are mining operations carried on in Australia or in Papua New Guinea for the purpose of obtaining petroleum.

"property" is defined as including a petroleum prospecting or mining right. The term is used for the purposes of the provisions of the proposed new section 124AM that apply where property which has been used in the carrying on of petroleum mining operations is disposed of, lost or destroyed, or has ceased to be used for petroleum mining purposes. It is also relevant in the calculation of the residual capital expenditure of a mine owner in accordance with the provisions of the proposed new section 124AC - see notes on those sections in this memorandum.

Sub-section (2) is a drafting measure. Its purpose is to ensure that, where appropriate, a reference to deductions allowed or allowable under the proposed new Division 10AA shall be read as including a reference to deductions allowed or allowable under the existing provisions of Division 10AA of the Principal Act. The sub-section is important in the application of those provisions of the proposed new Division 10AA in which account must be taken of deductions allowed or allowable in respect of particular items of capital expenditure irrespective of whether those deductions are allowed or allowable under the new Division or under the present law.

Sub-section (3) provides for the case where a taxpayer carries on petroleum mining operations on two or more petroleum fields. In such a case, the relevant provisions of the proposed new Division 10AA will generally be applied in respect of each field as if it were the only field on which the taxpayer carries on petroleum mining operations. This will mean that a separate residual capital expenditure will be calculated for each field and, in making that calculation for any one field, that any matters relating to any other field must be disregarded. At the same time, any allowable expenditures, including, for example, the cost of plant for preliminary treatment of oil or gas, which do not relate exclusively to any one petroleum field, is to be apportioned between each petroleum field for the purposes of calculating the residual capital expenditure of each field.

This apportionment of expenditures between petroleum fields will not apply in respect of expenditures that qualify as unrecouped capital expenditure or as exploration or prospecting expenditure.

Sub-section (4) provides for the case where a taxpayer disposes of a petroleum prospecting or mining right or petroleum prospecting or mining information and is a party to a notice given to the Commissioner under section 124AB. As explained in the notes on section 124AB it is intended that one effect of such a notice is to reduce by the amount duly specified in the notice the deductions otherwise available to the vendor. The purpose of this sub-section is to ensure that the amount specified in a notice under section 124AB is identified as expenditure incurred by the vendor so that the appropriate adjustments may be made to the deductions otherwise available to the vendor.

Sub-section (5) applies where an amount specified in a notice under section 124AB exceeds the amount that may be specified for the purposes of the section. In this case, section 124AB provides that the amount specified shall be deemed to be the amount actually specified less the excess. This sub-section provides that in this sort of case any reference in the proposed Division 10AA to an amount specified in a notice shall be read as a reference to the reduced amount which is deemed to be specified.

Section 124AA: Allowable capital expenditure.

The principal purpose of this section is to set out the types of capital expenditure that qualify for deduction under the proposed new Division 10AA on a "life of field" basis. It will generally apply to the capital costs associated with developing and operating a petroleum mining field. It does not apply to exploration costs which will retain their immediate deductibility under the proposed section 124AH.

Because of the need to preserve to taxpayers their entitlement to deductions under the basis of the existing law for pre-Budget expenditures, the section also provides a commencing date for expenditures which will be deductible on the "life of field" basis or, in the case of plant, as depreciation. (By pre-Budget expenditure is meant capital expenditure incurred on or before 17 September 1974 or incurred after that date and before 1 July 1976 in pursuance of a pre-Budget contract with the supplier of property or services.) Pre-Budget expenditures not covered by the section may qualify as unrecouped previous capital expenditure under the proposed new section 124AE.

Sub-section (1) provides for the section to apply to capital expenditure, other than pre-Budget expenditure, that is incurred after 17 September 1974.

Sub-section (2) specifies the classes of capital expenditure that may qualify as allowable capital expenditure. The main test is that the expenditure be incurred in carrying on mining operations for the obtaining of petroleum. It also specifically includes expenditure on buildings, other improvements or plant necessary for carrying on these operations.

Under paragraph (a) the scope of allowable capital expenditure includes the cost of providing water, light or power for use on the petroleum field or access to or communications with the site of the petroleum mining operations.

Paragraph (b) provides for the inclusion in allowable capital expenditure of so much of the cost of acquiring a petroleum prospecting or mining right or petroleum prospecting or mining information as is duly specified in a notice under section 124AB. As explained in detail in the notes on section 124AB, the allowable capital expenditure of a purchaser of such a right or information is also limited, broadly, to so much of the relevant capital expenditure of the vendor as has not been allowed as deductions plus any amount assessable to the vendor under section 124AM in respect of the transaction.

Paragraph (c) brings within the scope of allowable capital expenditure the costs of providing residential accommodation for the use of employees engaged in, or in connexion with, prescribed petroleum operations or for the use of dependants of those employees. The residential accommodation must be situated on, or adjacent to, the site of the operations.

Paragraph (d) includes in allowable capital expenditure the capital costs of providing health, education, recreation or similar facilities provided principally for the welfare of employees or their dependants. The facilities must be on, or adjacent to, the site of the petroleum mining operations and must not be conducted for the purpose of profit-making.

Paragraph (e) provides for the inclusion in allowable capital expenditure of costs in relation to works which have a direct connexion with the accommodation and facilities referred to in paragraphs (c) and (d) including the provision of water, light, power, access or communications.

Some categories of capital expenditure are specifically excluded from allowable capital expenditure by paragraphs (f), (g) and (h).

Paragraph (f) excludes expenditure on pipe-lines constructed for the transport of petroleum from the petroleum field, and ancillary plant used primarily, principally and directly in connexion with the operation of the pipe-line. The exclusion does not extend to pipelines forming part of the petroleum mining operations.

Paragraph (g) excludes capital expenditure on ships, railway rolling-stock and road vehicles for use in transporting petroleum, other than road vehicles used in the petroleum mining operations.

Paragraph (h) excludes expenditure on plant for use in refining petroleum or products of petroleum.

Section 124AB: Purchase of prospecting or mining rights or information.

This section relates to the acquisition of a petroleum prospecting or mining right or petroleum prospecting or mining information. As explained in the notes on section 124AA(b), capital expenditure incurred by a taxpayer in acquiring such a right or information from another person may, within certain limits, be included in the allowable capital expenditure of the purchaser for the purposes of Division 10AA. This course is followed where a notice under section 124AB is given to the Commissioner by the vendor and purchaser.

Sub-section (1) provides for the section to apply where a person incurs expenditure after 17 September 1974 otherwise than in pursuance of a contract made on or before that date in acquiring a petroleum prospecting or mining right or petroleum prospecting or mining information. In these circumstances the purchaser and the vendor may give notice to the Commissioner that they have agreed that so much of the cost as is specified in the notice is to be included in the allowable capital expenditure of the purchaser.

Stated broadly, the effect of such a notice will be to entitle the purchaser to deductions over the life of the relevant petroleum field for the amount duly specified in the notice, while a corresponding reduction will be made in the deductions otherwise available to the vendor.

Sub-section (2) has application where a person incurs expenditure on or before 17 September 1974, or after that date and before 1 July 1976 in pursuance of a contract made on or before 17 September 1974 in acquiring a petroleum prospecting or mining right or information. In this case, the effect of the vendor and the purchaser giving notice to the Commissioner will be to include so much of the cost specified in the notice in the unrecouped capital expenditure of the purchaser. Thus, this sub-section will preserve to a purchaser the entitlement to immediate deductibility against petroleum income available under the present law for pre-Budget expenditure.

Sub-section (3) provides for limits on the amounts which may be included in the allowable capital expenditure or the unrecouped previous capital expenditure of a purchaser as the result of a notice given under the section.

Paragraph (a) refers to the amount of the capital expenditure (other than expenditure on plant) incurred by the vendor in relation to the area which is the subject of the right or to which the information relates. The amount to be taken into account for the purposes of the section is the amount of the relevant expenditure that would have been included in the residual capital expenditure of the vendor as at the end of the year of income in which the transaction occurs if the notice (or a notice in relation to a subsequent sale of a right or information during that year) had not been given to the Commissioner.

In broad terms, the amount involved will be so much of the residual capital expenditure of the vendor as was incurred in developing a petroleum field situated on the area which is the subject of the right or to which the information relates. Expenditure on buildings and improvements, including housing and welfare, will not, however, be taken into account unless the purchaser of the right acquires them, or an interest in them, when he purchases the right - see notes on sub-section (4).

The undeducted cost of mining plant is not taken into account because it may be acquired by any person independently of a transaction involving a mining or prospecting right. The purchase price of such plant may, therefore, qualify as allowable capital expenditure under the general provisions of the proposed new section 124AA.

Paragraph (b) refers to the amount of the capital expenditure incurred by the vendor in relation to the area which is the subject of the right or to which the information relates as, but for the transaction, would have been included in the unrecouped previous capital expenditure of the vendor as at the end of the relevant year of income. This would represent pre-Budget expenditure of the vendor which would be included in unrecouped capital expenditure under the present law or under the transitional arrangements of the proposed new Division 10AA.

Paragraph (c) refers to exploration or prospecting expenditure (other than expenditure on plant in use by the vendor at the date of the transaction) incurred by the vendor that has not been allowed, or is not allowable, as a deduction in the year for which the notice is given to the Commissioner or in a prior year. Expenditure covered by this paragraph does not have to relate to exploration or prospecting carried out on the area which is the subject of the right or to which the information relates.

Paragraph (d) refers to an amount included in the vendor's assessable income under section 124AM as the result of the sale of the property to which the notice relates. Section 124AM provides for the inclusion in the assessable income of a taxpayer of so much of the sale price of property as represents a recoupment of deductions allowed to the taxpayer in respect of capital expenditure on that property.

Where the amount specified in a notice for the purposes of section 124AB exceeds the sum of the amounts referred to in paragraphs (a) to (d), sub-section (3) provides that the amount specified shall be deemed to be reduced by that excess.

Sub-section (4) will have effect only in isolated cases where a purchaser of a petroleum prospecting or mining right does not acquire any interest in buildings or improvements situated on the area subject to the right or used in connexion with the mining operations on that area. In these circumstances, the undeducted capital expenditure of the vendor on the improvements will not be taken into account for the purposes of the section.

Sub-section (5) provides for a notice under section 124AB to be in writing signed by or on behalf of the persons giving it. A notice may be lodged with the Commissioner of Taxation not later than two months after the end of the income year of the purchaser in which the transaction occurred. The Commissioner is authorised to extend the time for lodgment of a notice.

Sub-section (6) provides for the reduction of the sum of the amounts referred to in paragraphs (a) and (c) of sub-section (3) where the vendor of the right or information has an amount of net declared capital for the purposes of section 124AR of the proposed new Division 10AA.

The term, `net declared capital' is defined in the proposed section 124AR. It is, broadly, so much of the sum of the amounts received by a company as moneys paid on shares and specified in declarations made by the company in pursuance of section 77D of the Principal Act as has not been applied to reduce the deductions allowable to the company for capital expenditure. A result of making declarations under section 77D is that a company elects to forgo deductions otherwise available to it under Division 10AA to the extent of the amount declared so that deductions will be available for that amount to the shareholders of the company.

The purpose of sub-section (6) is to preserve this principle by restricting the deductions available to a purchaser of a mining or prospecting right or information to so much of the amounts referred to in paragraphs (a) and (c) of sub-section (3) as exceeds the net declared capital of the vendor. This will ensure that the purchaser is not entitled to greater deductions in relation to expenditure incurred in acquiring the right or information than the vendor would have been entitled to if the right or information had not been sold.

Where the net declared capital relates to expenditure on more than one area, the Commissioner is authorised to determine the proportion of the total net declared capital as may reasonably be attributable to the area subject of the right or information disposed of. In such a case, only that proportion shall be taken into account for the purposes of the sub-section.

Section 124AC: Residual capital expenditure.

This section provides the basis for determining the amount of the residual capital expenditure of a taxpayer as at the end of a year of income. The amount so determined as at the end of any income year is available for deduction over the life of the petroleum field to which it relates.

By virtue of the proposed new section 124(3), where a taxpayer carries on prescribed petroleum operations on two or more fields, this section will apply separately to each field. In such a case there will be an amount of residual capital expenditure for each field.

In broad terms, the residual capital expenditure will be so much of the allowable capital expenditure incurred by a taxpayer up to the end of a year of income as has not been allowed as a deduction in a previous year of income. Exploration and prospecting expenditure will not be included in residual capital expenditure.

Sub-section (1) of section 124AC prescribes the amounts to be taken into account in order to ascertain the residual capital expenditure as at the end of a year of income. From the allowable capital expenditure incurred up to the end of the relevant year of income is to be deducted the sum of amounts specified in paragraphs (a), (b) and (c).

Sub-paragraph (i) of paragraph (a) provides for the deduction from allowable capital expenditure of amounts allowed or allowable under section 124AD over the estimated life of the petroleum field in a preceding year of income.

Sub-paragraph (ii) of paragraph (a) provides for the deduction from allowable capital expenditure of the undeducted amount of expenditure on property which has been disposed of, lost or destroyed or the use of which for carrying on prescribed petroleum operations has been otherwise terminated. Property subject to a notice under section 124AB is not covered by this sub-paragraph but by paragraph (b).

Paragraph (b) provides for the deduction from the allowable capital expenditure of so much of amounts specified in notices under section 124AB as would, but for this paragraph, be included in the residual capital expenditure of the vendor of a petroleum right or information.

Paragraph (c) requires amounts of petroleum search subsidies paid by the Australian Government in respect of post-Budget expenditure to be deducted from the allowable capital expenditure. Petroleum search subsidies paid in respect of pre-Budget expenditure will be deducted from unrecouped previous capital expenditure under paragraph (g) of section 124AE. Where any subsidies are repayable to the Australian Government by a taxpayer, the paragraph provides, in effect, for the residual capital expenditure to be increased by the amount of the repayment.

Sub-section (2) applies where a taxpayer brings into use for petroleum mining operations after 17 September 1974 property that had previously been used for such operations but had ceased to be so used or property that had previously been used for non-petroleum mining operations. In these cases, the sub-section provides that an amount considered reasonable by the Commissioner shall be treated as allowable capital expenditure incurred in the year of income in which the property commences or recommences to be used for petroleum mining operations. This will have the effect of increasing the residual capital expenditure by the relevant amount.

Sub-section (3) provides that sub-section (2) is to operate notwithstanding section 122N which is contained in Division 10 of the Principal Act.

Section 122N has the purpose of preventing double deductions in respect of an amount of capital expenditure that qualifies for deduction under the general mining provisions of Division 10. It provides that expenditure that is deductible under Division 10 is not to be deductible under any other provision of the Principal Act.

In the generality of cases, this safeguard is necessary. However, there may be cases where expenditure on an item of plant which qualifies under Division 10 ceases to be used for general mining and commences to be used for petroleum mining. In such a case, it may be reasonable to allow deductions in accordance with sub-section (2) from the time the plant commences to be used for petroleum mining operations.

Section 124AD: Deduction of expenditure.

Section 124AD is the operative section that authorises deductions for residual capital expenditure over the life of the petroleum field.

Sub-section (1) provides that where a taxpayer has an amount of residual capital expenditure as at the end of a year of income, a deduction is allowable in accordance with section 124AD.

Sub-section (2) provides that the deduction for any year is ascertained by dividing the amount of the residual capital expenditure as at the end of the year by the lesser of the number of years in the estimated life of the petroleum field as at the end of the year of income or twenty-five. This follows the principle contained in the general mining provisions of Division 10. The maximum period of twenty-five years in relation to each successive income year has been adopted to enable petroleum producing enterprises to obtain deductions for residual capital expenditure based on a reasonable period.

Reference has already been made in the notes on the proposed new section 124(3) to the situation where a taxpayer carries on prescribed petroleum mining operations on two or more petroleum fields. In these circumstances, a separate amount of residual capital expenditure is to be ascertained for each field. The deductions allowable under section 124AD will, therefore, be determined for each field on the basis of the estimated life of that field.

Sub-section (3) provides that the deduction allowable under section 124AD in a year of income is limited to the amount of the assessable income from petroleum which remains after allowing all other deductions other than a deduction under section 124AD or under the proposed new section 124AH in respect of exploration or prospecting expenditure. This provision is included so that a taxpayer will not be deprived of an effective deduction for allowable capital expenditure through the operation of section 80 of the Principal Act. This could occur where the taxpayer has insufficient income in the seven years subsequent to the year in which the deduction is allowable to recoup the full amount of that deduction.

Provision is also made for the case where a taxpayer carries on prescribed petroleum mining operations on more than one petroleum field. In such a case the total deductions on all fields is limited to what may be termed the net income after the allowance of other deductions. If the total deductions allowable under section 124AD exceed that net income, the excess is applied to proportionately reduce the deductions in respect of each field.

An amount excluded from the deduction allowable for a particular year under this sub-section remains in residual capital expenditure to be deducted in future years without any time limit.

Sub-section (4) explains the type of deductions that are to be taken into account for the purposes of sub-section (3). They will include any deductions allowable otherwise than under this section and under section 124AH that relate exclusively to the assessable income from petroleum. They will also include so much of any other deductions (other than under sections 124AD and 124AH) that, in the Commissioner's opinion may appropriately be related to that income. Deductions allowable under sections 124AF and 124AM in respect of unrecouped previous capital expenditure and losses on disposal of property respectively, are to be taken into account.

Sub-section (5) provides for the case where the Commissioner is not satisfied that a taxpayer's estimate of the life of a petroleum field is reasonable. In these circumstances, the section gives the Commissioner power to substitute an estimated life which he considers reasonable. An opinion formed by the Commissioner pursuant to this provision will, of course, be subject to review under the general objections and appeals provisions.

Section 124AE: Unrecouped previous capital expenditure.

As explained in the introductory notes to the proposed new Division 10AA, the basis of immediate deductibility available under the present law will be preserved in the new Division 10AA in respect of pre-Budget expenditure that qualifies as allowable capital expenditure. This preservation of deductions under the terms of the present law is done by section 124AE which largely follows the lines of section 124DF of the present law apart from the introduction of the cut-off date of 17 September 1974.

Paragraph (a) provides for the inclusion in the unrecouped previous capital expenditure of a taxpayer of so much of the amount that, under section 124DF of the present law, was the unrecouped capital expenditure as at the end of the year of income next preceding the year of income in which 17 September 1974 occurs as remains after deducting any part of that amount that is allowable under section 124DG of the present law in respect of that year of income.

Paragraph (b) provides for the inclusion in unrecouped previous capital expenditure of so much of expenditure as would be allowable capital expenditure under section 124DD of the Principal Act as is incurred after the end of the year of income mentioned in paragraph (a) and before the end of the relevant year of income, being expenditure incurred on or before 17 September 1974, or after that date and before 1 July 1976 in pursuance of a contract made on or before that date with the supplier of property or services or the vendor of a petroleum prospecting or mining right or information. For the purposes of this paragraph, allowable capital expenditure will include capital expenditure on exploration, on carrying on petroleum mining operations, and on acquiring a petroleum mining or prospecting right or petroleum mining or prospecting information.

Paragraphs (c) to (g) provide for amounts falling within the categories specified to be deducted from the sum of the amounts referred to in paragraphs (a) and (b) in ascertaining the unrecouped previous capital expenditure.

Sub-paragraph (i) of paragraph (c) requires the sum of the amounts referred to in paragraphs (a) and (b) to be reduced by amounts that have been allowed or are allowable as deductions under the proposed new section 124AF in respect of a prior year of income. As explained in the notes on section 124AF, that section provides for the deduction against assessable income from petroleum of so much of the unrecouped previous capital expenditure as does not exceed the net assessable income from petroleum.

Sub-paragraph (ii) of paragraph (c) provides for the exclusion from the unrecouped previous capital expenditure of the undeducted amount included therein in respect of property that has been disposed of, lost or destroyed, or the use of which for carrying on prescribed petroleum mining operations has been otherwise terminated. However, the sub-paragraph does not apply in respect of property in respect of which a notice has been given under section 124AB or under the present corresponding section 124DE of the Principal Act. These sections are concerned with the disposal of a petroleum prospecting or mining right or petroleum prospecting or mining information and are dealt with in paragraph (d).

Paragraph (d) provides for the exclusion from the unrecouped previous capital expenditure of so much of the amounts specified in notices duly given to the Commissioner under section 124AB in relation to the disposal of a petroleum mining or prospecting right or information. The amount to be excluded under this paragraph will be so much of the amount specified as the Commissioner considers to be attributable to expenditure that would, but for this paragraph, be included in the unrecouped previous capital expenditure of the taxpayer.

Paragraph (e) requires, broadly, the total amounts of net exempt income from petroleum derived by the taxpayer during the year of income and previous years to be deducted from the sum of the amounts in paragraphs (a) and (b).

Net exempt income from petroleum that has been applied to reduce a loss allowable as a deduction under section 80 of the Principal Act is not, however, to be deducted when ascertaining the unrecouped previous capital expenditure.

Also excluded from the net exempt income from petroleum is the amount of any loss incurred during the year of income or in any preceding year in relation to exempt income from petroleum. A loss is deemed to be incurred where the non-capital expenses incurred in earning the exempt income and overseas taxes paid in respect of the exempt income exceed that exempt income. For the purposes of the paragraph, net exempt income from petroleum of a year of income preceding the year of income in which 17 September 1974 occurs is not taken into account because this will already be reflected in the amount ascertained under paragraph (a).

Paragraph (f) provides for the exclusion from unrecouped previous capital expenditure of amounts received as share capital and specified in declarations lodged under section 77D of the Principal Act to the extent that these amounts are deemed by section 77D(20) to have been specified in relation to petroleum, and were expended -

(i)

in the year of income in which 17 September 1974 occurs or a later year of income, and

(ii)

on or before 17 September 1974 or after that date and before 1 July 1976 in pursuance of a pre-Budget contract for the acquisition of property or the performance of work.

Paragraph (g) requires the sum of the amounts in paragraphs (a) and (b) to be reduced by amounts of petroleum search subsidies paid by the Australian Government where the amounts are in respect of expenditure incurred on or before 17 September 1974, or incurred after that date and before 1 July 1976 in pursuance of a contract made on or before 17 September 1974 with a supplier of property or services. Only subsidies received in a year of income in which 17 September 1974 occurs or a later year of income will be covered by the paragraph. Subsidies received in earlier years will be reflected in paragraph (a). The paragraph also provides for the reduction of the amounts of subsidy covered by the paragraph by any amounts repaid by the taxpayer to the Australian Government.

Section 124AF: Deductions of unrecouped previous capital expenditure.

This section authorises a deduction in respect of unrecouped previous capital expenditure on the same basis as under section 124DG of the present law.

Sub-section (1) provides that a deduction for the unrecouped previous capital expenditure of a taxpayer as at the end of a year of income shall be allowable from the assessable income from petroleum of the taxpayer. As explained previously, assessable income from petroleum means assessable income derived from the sale of petroleum obtained from mining operations carried on by the taxpayer in Australia or in Papua New Guinea or of the products of petroleum so obtained. Accordingly, no deductions will be allowable under this section until the taxpayer produces petroleum in commercial quantities in Australia or Papua New Guinea.

The deduction is limited to the net amount of assessable income from petroleum remaining after deducting from that income all deductions allowable otherwise than under this section and sections 124AD and 124AH in respect of that assessable income. If the unrecouped capital expenditure exceeds that net amount, the excess remains available for deduction in a subsequent year when further assessable income from petroleum is derived. Section 124AD provides for the annual deduction in respect of residual capital expenditure and section 124AH provides for the deduction of exploration expenditure. The exclusion of deductions under these two sections for the purposes of calculating the deduction under section 124AF has the effect of allowing deductions under section 124AF ahead of these other two deductions.

Sub-section (2) states the basis for determining the deductions allowable, otherwise than under sections 124AD and 124AH and this section, in calculating the net amount of assessable income from petroleum.

Deductions related exclusively to assessable income from petroleum are to be deducted from that income, together with so much of any other deduction allowable for the year of income as, in the opinion of the Commissioner, may appropriately be related to the assessable income from petroleum.

A taxpayer dissatisfied with the Commissioner's basis of apportioning indirect deductions, will have the usual rights of objection and reference to a Taxation Board of Review.

Section 124AG: Election that Division not to apply to plant.

This section will permit a person who has incurred allowable capital expenditure or exploration or prospecting expenditure to elect to have the normal depreciation provisions of the Principal Act apply in respect of plant instead of having the cost deducted over the estimated life of the petroleum field or as exploration and prospecting expenditure under section 124AH. It follows the lines of a similar provision in Division 10 of the Principal Act relating to general mining. Deductions for depreciation as the result of an election under section 124AG will be allowable against any assessable income of the taxpayer.

Sub-section (1) formally provides the petroleum miner with the right to elect that the section shall apply in respect of expenditure on a unit of plant referred to in the election. If such an election is made, the cost of the plant is deemed not to be allowable capital expenditure or exploration or prospecting expenditure for the purposes of the Division and the normal depreciation provisions will apply. If expenditure on a unit of plant is made in more than one income year, the election is to have effect for the total cost of the plant.

Sub-section (2) requires the election to be made in respect of the first year of income in which capital expenditure is incurred on the unit of plant.

Sub-section (3) provides for an election under the section to be in writing signed by or on behalf of the taxpayer and lodged with the Commissioner on or before the last day for the furnishing of the taxpayer's return. The Commissioner is empowered to allow further time for lodgment.

Section 124AH: Exploration and prospecting expenditure.

Under the present law, allowable capital expenditure of a petroleum miner includes exploration expenditure and expenditure in carrying on mining operations. Once petroleum mining operations commenced the total amount of allowable capital expenditure incurred up to that time became deductible against petroleum mining income and the only limitation on the amount of the deduction was the amount of that income.

As already explained, this Bill proposes, in the new Division 10AA, to distinguish between exploration expenditure and expenditure in carrying on petroleum mining operations. The former will continue to be deductible up to the limit of net assessable income from petroleum while the latter will be deductible over the estimated life of the petroleum field or, in the case of plant, as depreciation.

Sub-section (1) provides that expenditure on exploration or prospecting for petroleum in Australia or Papua New Guinea is an allowable deduction. "Exploration or prospecting" is defined in sub-section (7).

Sub-section (2) limits the deduction under the section to a taxpayer who derives assessable income from petroleum. It also limits the deduction allowable to so much of the assessable income from petroleum as remains after deducting all other allowable deductions relating to that income including deductions allowable under Division 10AA. This is in line with the basis adopted in section 122J in respect of exploring for minerals other than petroleum.

Sub-section (3) specifies the allowable deductions to be taken into account in arriving at the net assessable income from petroleum for the purposes of calculating the deduction allowable under this section. The deductions to be taken into account are those that relate exclusively to the assessable income from petroleum and so much of any other deductions as the Commissioner considers may appropriately be related to that income. Specifically included are deductions allowable under sections 124AD, 124AF and 124AM which will accordingly be allowed before the deductions under section 124AH. In this way, the entitlement to immediate deductions for exploration expenditure will not be at the expense of amounts allowable in a year of income under the other provisions mentioned.

Sub-section (4) applies where the exploration expenditure incurred by a taxpayer in an income year exceeds the deduction allowable under sub-section (2). This may occur because the taxpayer is not in receipt of assessable income from petroleum or because the amount of that income is insufficient to fully recoup the exploration expenditure. This excess is deemed to have been incurred by the taxpayer in the first subsequent year in which assessable income from petroleum is derived. This permits the excess to be available for deduction again in accordance with sub-section (2) and this is repeated in subsequent years until the expenditure is fully recouped.

Sub-section (5) covers the case where the whole or part of an excess amount referred to in sub-section (4) is to be taken into account under the proposed new section 124AB to determine the amount to be included in the allowable capital expenditure of a purchaser of a petroleum mining or prospecting right or information. In such a case, it is necessary to ensure that neither the vendor nor any subsequent purchaser of a petroleum mining or prospecting right or information from the vendor becomes entitled to a deduction for that same amount.

This is done by specifically providing -

(a)

that sub-section (4) shall not operate to deem so much of that excess amount as has been taken into account under section 124AB to be allowable capital expenditure of the vendor of any year of income; and

(b)

that so much of the excess amount as has been taken into account for the purposes of section 124AB shall not be available to any subsequent purchaser of a petroleum mining or prospecting right or information from the vendor.

Sub-section (6) provides for the transition from the present law to the proposed new Division 10AA. It does this by providing that the proposed new section 124AH applies to expenditure incurred in the year of income in which 17 September 1974 occurred and in any subsequent income year, other than expenditure incurred on or before 17 September 1974 or after that date and before 1 July 1976 in pursuance of a pre-Budget contract with the supplier of property or services.

Expenditure on exploration or prospecting which is excluded by this sub-section will qualify as unrecouped previous capital expenditure under section 124AE.

Sub-section (7) defines "exploration or prospecting" for the purposes of the section. The term includes geological, geophysical and geochemical surveys, exploration drilling and appraisal drilling. It does not include development drilling or operations in the course of working a petroleum field. Capital expenditure incurred on the items specifically excluded from the definition will qualify as allowable capital expenditure and be deductible over the estimated life of the field or, in the case of plant, as depreciation if the taxpayer so elects.

Section 124AJ: Prospecting or mining by contractors, profit sharing arrangements, etc.

This section corresponds with section 124DH of the present Division 10AA.

Sub-section (1) of section 124AJ will apply where a holder of a petroleum prospecting or mining right pays another person, e.g., a contractor, to undertake work that would qualify as prescribed petroleum operations or exploration or prospecting if undertaken by the holder of the right. The prescribed petroleum operations or exploration or prospecting will, in those circumstances, be regarded as having been carried on by the holder of the right and the payment will be treated as expenditure incurred by the holder in carrying out those operations.

The provision will not, however, apply where a person carries out prescribed petroleum operations or exploration or prospecting on a right held by another person in return for a share of income derived by the holder of the right from sales of petroleum or its products. Nor will it affect the position of a person who carries out those operations in consideration for an interest in a right attaching to land on which the operations are undertaken or some other right. In these latter two cases, the cost of the prescribed petroleum operations or exploration will qualify as expenditure of the taxpayer who incurred them.

Sub-section (2) relates to profit-sharing joint ventures and farm-out arrangements. Under these classes of arrangements a taxpayer may carry out prescribed petroleum operations or exploration or prospecting on a right held by another taxpayer on the basis of an entitlement to a share of the income derived if petroleum is produced commercially in consequence of the operations or exploration. Alternatively, a taxpayer may acquire a petroleum prospecting or mining right by undertaking exploration and prospecting operations on the land concerned and agreeing to pay to the previous holder of the right a specific share of the income that may in the future be derived from the sale of petroleum produced from the land to which the right relates.

The effect of sub-section (2) is that a share of income received in such circumstances will be regarded as income derived from the sale of petroleum (or its products) produced by the recipient in Australia or Papua New Guinea. In consequence, allowable capital expenditure incurred by the recipient will be deductible from the share of income received under such an arrangement.

The sub-section will also ensure that the payments of a share of income in these circumstances do not qualify as expenditure of a kind in respect of which deductions may be allowed in the hands of the taxpayer producing and selling the petroleum.

Sub-section (3) will apply where a petroleum prospecting or mining right or an interest in such a right is assigned or sub-let by a taxpayer as consideration for prescribed petroleum operations carried out on that or some other right by another person or for exploration or prospecting carried out by the other person.

In these circumstances the capital expenditure incurred by the person carrying out the operations will qualify as allowable capital expenditure or exploration or prospecting expenditure of that person. Sub-section (3) ensures that section 21 of the Principal Act will not operate so as to entitle the person assigning or sub-letting the right (or an interest in the right) to have the value of it included in expenditure in respect of which deductions are allowable under the Division. (Section 21 provides that where, upon any transaction, consideration is paid or given otherwise than in cash, the money value of that consideration shall be deemed to have been paid or given.)

Section 124AK: Transactions between persons not at arm's length.

This section corresponds with section 124DC of the Division to be repealed.

The section is designed as a safeguard in relation to sales of property where the Commissioner is satisfied that the purchaser and the vendor of property were not dealing with each other at arm's length, e.g., where property is sold by a parent company to a subsidiary or an associated company.

In these circumstances, the Commissioner will be authorised to adopt the amount that, in his opinion, is the value of the property at the date of the transaction if that value is greater or less than the purchase price. The value so adopted will have effect in the assessments of both the vendor and the purchaser.

The provision will apply to the purchase of property where the cost of the property (other than a petroleum prospecting or mining right) qualified as expenditure of a kind giving rise to allowable deductions under Division 10AA in the hands of either the vendor or the purchaser. The sale of a petroleum prospecting or mining right is excluded from the operation of the section because restrictions are placed on the deductions available to a purchaser of such a right by section 124AB.

A taxpayer who is dissatisfied with a decision of the Commissioner under the section will have the usual rights of objection and reference to a Taxation Board of Review.

Section 124AL: Petroleum or petroleum products used in manufacturing other goods.

Section 124AL applies where a taxpayer carrying on mining operations uses Australian or Papua New Guinea petroleum so obtained (or products of that petroleum) in the manufacture of other goods. It replaces an identical provision contained in the present section 124DJ.

As already explained deductions under Division 10AA are allowable only from assessable income derived from the sale of Australian or Papua New Guinea petroleum by the taxpayer who obtained that petroleum from mining operations. Moreover, the deductions in relation to an income year are limited to the net amount of such income derived during that year as remains after deducting all other relevant allowable deductions other than deductions under the Division.

Accordingly, if the petroleum is used in the manufacture of other goods during an income year, the assessable income of the taxpayer from petroleum against which a deduction under Division 10AA may be allowed would be less than if the petroleum had been sold. This could have the effect of reducing a deduction or deductions which would otherwise be allowable for that year.

To remedy that situation, the market value of the petroleum or a petroleum product used in manufacture will be deemed by section 124AL to be assessable income derived from the sale of the petroleum or its products during the income year that it is used in manufacture. The effect of this will be to place the taxpayer, as nearly as practicable, in the same position for purposes of the allowance of deductions under the Division as if the petroleum or petroleum product had been sold instead of being used in manufacture.

Section 124AM: Disposal, loss, destruction or termination of use of property.

Section 124AM provides for balancing charges to be made when property in respect of which expenditure has been or is deductible under the special provisions of Division 10AA is disposed of, lost, or destroyed, or its use for purposes of prescribed petroleum operations or petroleum exploration has been terminated. If a taxpayer has elected under section 124AG to have the depreciation provisions of the Principal Act applied in respect of a unit of plant, any balancing adjustment required on a disposal, loss or destruction of the plant will be made under section 59 of that Act instead of under section 124AM.

Sub-section (1) formally provides that the section applies where deductions have been allowed or are allowable under the proposed new Division 10AA, or under the Division it replaces, in respect of capital expenditure on property that has been disposed of, lost or destroyed or that has ceased to be used for the purposes of prescribed petroleum operations or exploration or prospecting for petroleum.

Sub-section (2) applies where the sum of the deductions allowed or allowable in respect of expenditure on property and the consideration receivable on the disposal, loss or destruction of the property, or the value of the property at the date it ceased to be used for eligible purposes, exceeds the total capital expenditure of the taxpayer on the property. In such a case, so much of the amount of the excess as does not exceed the deductions allowed, or allowable, is included in the taxpayer's assessable income.

Amounts so included in assessable income are, under sub-section (2), to be deemed for the purposes of Division 10AA to be assessable income from petroleum. This is to ensure that the amounts so included will increase the amount of net assessable income from petroleum against which special deductions under the Division may be allowed.

Sub-section (3) applies in the converse case where the total capital expenditure on property exceeds the sum of the deductions allowed or allowable in respect of expenditure on that property and the consideration receivable on the disposal, loss or destruction of the property, or the value of the property at the date it ceased to be used for eligible purposes. In this event, a deduction is allowable for the amount of the excess, subject to the limitation imposed by sub-section (4) referred to below.

Sub-section (4) limits the amount that may be allowed as a deduction under sub-section (3) in any year of income to the net amount of assessable income from petroleum derived in that year after allowing for all deductions allowable in respect of that income except deductions allowable under other provisions of Division 10AA.

Where the limitation applied by sub-section (4) reduces the amount that would otherwise qualify as a deduction under sub-section (3) in respect of a year of income, sub-section (5) ensures that the resulting excess is carried forward as an amount to be allowable successively as a deduction from the assessable income of the next income year or years in which the taxpayer derives assessable income from petroleum.

Sub-section (6) is a drafting measure which provides the basis for determining the income tax deductions allowable (other than deductions under other provisions of Division 10AA) in calculating the net amount of assessable income from petroleum.

Deductions related exclusively to assessable income from petroleum are to be deducted from that income, together with so much of any other deduction allowable for the year of income as, in the opinion of the Commissioner, may appropriately be related to the assessable income from petroleum.

A taxpayer dissatisfied with the Commissioner's basis of apportioning indirect deductions will have the usual rights of objection and reference to a Taxation Board of Review.

Sub-section (7) contains a definition of the term "consideration receivable in respect of the disposal, loss or destruction" used in section 124AM. In effect, this phrase means either the net sale price where property is sold or the insurance recoverable where property is destroyed. Any amount receivable on the grant, assignment or surrender of a lease which remains assessable under the former lease provisions of the Principal Act is, however, to be excluded from any consideration receivable that is taken into account for the purposes of the balancing adjustments under section 124AM.

Section 124AN: Double deductions.

This section corresponds with the present section 124DN that is to be repealed.

Sub-section (1) of the proposed section 124AN provides that an amount of capital expenditure that qualifies as an allowable deduction under Division 10AA shall not be deductible, or be taken into account in ascertaining the amount of an allowable deduction, under any other provision of the Principal Act. This will ensure that deductions are not available under more than one provision of that Act in respect of expenditure to which Division 10AA relates.

Sub-section (2) modifies the effect of sub-section (1) in the case of property that is used for other purposes in producing assessable income after its use in prescribed petroleum operations or in exploration or prospecting for petroleum has been terminated.

In these circumstances it is not proposed to prohibit, in respect of plant used in the production of assessable income, deductions under the depreciation or general mining provisions where this would be appropriate.

Sub-section (3) is a drafting measure which complements sub-section (1). It provides that any amount that would have been allowed or allowable as a deduction under Division 10AA but for the operation of proposed sections 124AD(3), 124AF(1), 124AH(2) or 124AM(4) shall be deemed, for the purposes of sub-section (1), to have been allowed or allowable as a deduction. The four provisions cited limit the deductions allowable to an amount of assessable income from petroleum of the relevant year. However, in each case, the amounts not allowed as a result of this limitation are available for deduction in subsequent years. It is, therefore, necessary to ensure that these amounts are not deductible under other provisions of the Principal Act.

Section 124AO: Change in Interests in Property.

This section is designed to apply where there are transfers of interests in assets in respect of which deductions have been allowed under Division 10AA, including cases where the transfers are associated with the formation, variation or dissolution of a partnership.

By section 124AO, changes in interests in petroleum mining assets will be treated as disposals by the persons who owned the assets prior to the change to persons owning the assets after the change. The section will apply to a change in interests or ownership, so long as one of the parties who owned the assets before the change is one of the persons owning the assets after the change.

If an amount is specified by the parties as the value of the assets in a written agreement relating to the transfer of interests in the assets, that amount is to be regarded as the consideration receivable for the assets. However, in the event of no amount being specified in such an agreement, the Commissioner is authorised to determine an amount to be taken into account as consideration receivable for the assets.

An amount to be treated as the consideration receivable on the disposal of assets under section 124AO will then be taken into account in calculating the balancing adjustments to be made under the proposed section 124AM, the operation of which has been explained. That amount will also be taken into account for the purpose of determining the deductions available to the new owners of the assets under the provisions of Division 10AA.

Section 59AA of the Principal Act will continue to apply where there are changes in interests in plant which is subject to depreciation allowances by virtue of an election under proposed section 124AG discussed earlier.

Section 124AP: Commissioner to determine deductions attributable to particular expenditure.

The purpose of this section is to authorise the Commissioner to determine deductions that have been allowed under Division 10AA in respect of a particular item of expenditure where that item is part of one total sum for which deductions are allowed each year. For example, the proposed new section 124AD provides for a deduction which is calculated by dividing the residual capital expenditure by the number of years in the estimated life of the petroleum field. The residual capital expenditure is the sum of different items of expenditure incurred in different years. Where one of the items of allowable capital expenditure included in that sum is disposed of, lost or destroyed, it is necessary for the Commissioner to calculate the deductions that have been allowed in respect of that particular item so that balancing adjustments required under section 124AM may be made. The Commissioner's determination is open to review in the usual way.

Section 124AQ: Recoupment of expenditure.

This section provides for the exclusion from the application of Division 10AA of any amounts of capital expenditure for which the taxpayer has been recouped, or is entitled to be recouped, where the amount of the recoupment is not and will not be, included in the assessable income of the taxpayer.

The section will also provide for cases where deductions in relation to capital expenditure are allowed under the Division before any entitlement to recoupment has arisen. In these cases, the deductions previously allowed are to be adjusted, by amendment of assessments where necessary, to take into account amounts subsequently recouped.

Authority to make the necessary amended assessments is to be provided by a complementary amendment of section 170 of the Principal Act which delimits the power of the Commissioner in relation to amending income tax assessments. (See notes on clause 39.)

Section 124AQ corresponds with the recoupment provisions to be inserted in Divisions 10 and 10AAA by clauses 29 and 30 of the Bill.

Section 124AR: Reduction of allowable deductions where declarations lodged under section 77D.

As explained in the notes on clause 13 of the Bill, a company engaged in mining or prospecting for petroleum (including natural gas) or other minerals in Australia or Papua New Guinea could, by lodging an appropriate declaration under section 77D of the Principal Act, entitle its resident shareholders to deductions for moneys subscribed as paid-up capital on shares in the company. Deductions under section 77D are not generally available in respect of moneys paid on shares after 7 May 1973.

Where a company has elected to made a declaration under section 77D, the special deductions under Division 10AA to which it would otherwise be entitled for capital expenditure (where the declared moneys are expended in prospecting or mining for petroleum) are correspondingly reduced. Section 124AR authorises these reductions, and provides a basis on which to calculate them, in relation to expenditure incurred after 17 September 1974 except expenditure incurred after 17 September 1974 and before 1 July 1976 for which adjustments are to be made under section 124AE as already explained in the notes on that section.

Sub-section (1) contains definitions of several terms used in the section.

`mining company': Because of the relationship between the two sections, this term is given the same meaning as in section 77D. It means, broadly, a company that carries on, or that proposes to carry on, as its principal business, exploration, prospecting or mining in Australia for petroleum or other minerals, except gold.

`net declared capital': This is the amount which, from time to time, remains to be applied in reduction of the deductions of a company that has lodged a declaration under section 77D.

The first step in calculating the net declared capital is to ascertain amounts that have been specified in declarations made under section 77D to the extent that those moneys have been expended after 17 September 1974 on petroleum exploration or mining other than amount expended between 17 September 1974 and 30 June 1976 under a contract made on or before 17 September 1974. From this amount is deducted the sum of any amounts by which the company's deductions have been reduced in a previous income year by the application of this section. The net result so obtained will be the net declared capital as at the end of the relevant year of income.

`Prescribed deduction': This term specifies the type of deduction that may be reduced consequent on a declaration made by a mining company under section 77D. The deductions specified are, broadly -

•

deductions available under sections 124AD, 124AH or 124AM for allowable capital expenditure incurred by a company in carrying on prescribed petroleum operations or exploration or prospecting for petroleum; and

•

depreciation allowances on plant in respect of which the company has elected to be allowed deductions for depreciation in lieu of deductions available under the proposed new Division 10AA for the cost of the plant.

Sub-section (2) states the circumstances in which the prescribed deductions are to be reduced and quantifies the amount of the reductions. The sub-section will apply only where the three tests set out in paragraphs (a), (b) and (c) of the sub-section are satisfied. These tests are -

(a)

that the mining company concerned shall have lodged a declaration or declarations under section 77D;

(b)

that, in relation to the company, there is at the end of the year of income, an amount of net declared capital; and

(c)

that the company is (or would be but for section 124AR) entitled for the income year to prescribed deductions.

If all of these tests are satisfied, the Commissioner is required to apply the whole, or a part, of the net declared capital in reduction of the prescribed deductions in the following manner -

-

where the total prescribed deductions exceeds the net declared capital, paragraph (d) of sub-section (2) requires that the whole of the net declared capital is to be applied in reduction of the prescribed deductions;

-

where the total of prescribed deductions does not exceed the net declared capital, paragraph (e) of the sub-section requires the application of so much of the net declared capital as will reduce the prescribed deductions to NIL.

In a case where paragraph (d) has applied, there will be a full recoupment against the company's deductions of the deductions allowed to shareholders. Where paragraph (e) has applied, the balance, if any, of the net declared capital not applied in reduction of prescribed deductions for the relevant income year will remain available for set-off against prescribed deductions of subsequent years.

Sub-section (3) is a machinery provision to ensure that deductions available to a petroleum mining company for its allowable capital expenditure or for its exploration or prospecting expenditure, or by way of depreciation allowances, are not disturbed beyond the extent necessary to give effect to section 124AR.

This result is achieved by deeming those deductions to have been allowed in full even though they have been reduced consequent upon deductions being made available to shareholders in lieu of the company. As a result, the depreciated value of plant and the residual capital expenditure remain the same as if section 124AR had not operated to reduce the deductions.

Broadly stated, sub-section 124AB(3) is designed to limit the deduction available under Division 10AA in respect of expenditure incurred in acquiring a petroleum prospecting or mining right or petroleum prospecting or mining information to a corresponding amount of undeducted capital expenditure of the vendor of the right or information as at the end of the year of income in which the transaction took place.

The amendment to sub-section 170(10) to include a reference to section 124AB(3) will enable an assessment of the purchaser or the vendor of the right or information to be amended in a later year to give effect to that section if it is subsequently ascertained that the undeducted expenditure of the vendor as provisionally calculated does not accord with the facts as ultimately established.

Clause 34: Rebate in case of disposal of assets of a business of primary production.

This clause proposes an amendment to section 160 of the Principal Act consequential upon the proposed imposition of a surcharge of tax in respect of property income under the Income Tax Bill 1974. Section 160 provides for a rebate of tax where the assets of a business of primary production are disposed of for the purpose of putting an end to the business.

The property income surcharge is to be based on the tax payable after allowance of rebates, including the rebate under section 160, and the amendment proposed by this clause will ensure that the surcharge is not brought into account for purposes of section 160.

Sub-clause (1) amends the definition of "tax" in sub-section 160(5) of the Principal Act to exclude from that term the amount of the proposed surcharge. The amendment will enable the rebate to be calculated before the surcharge is calculated.

Sub-clause (2) provides that the amendment of the definition of "tax" in sub-section 160(5) of the Income Tax Assessment Act will apply in respect of income of the 1974-75 and subsequent years.

Clause 35: Rebate in respect of deductions for dependants.

This clause will authorise a new rebate of tax for people with relatively low incomes who are entitled to concessional deductions for the maintenance of dependants. The basic concept is that taxpayers are to be entitled to a tax saving of at least 40 per cent of the amount of maintenance deductions. For example, a taxpayer in 1974-75 who, after $832 of deductions for the maintenance of a wife and 2 children, has a taxable income of $6,000 will have saved tax, because of the deductions of $316.16. A rebate of $16.64 will be available under section 160AA which, when added to the amount of $316.16, will bring the total tax saving from the deductions up to $332.80 (i.e. 40 per cent of $832).

Sub-clause (1) will insert in the Principal Act a new section - section 160AA.

Sub-section (1) of new section 160AA provides in effect that where the tax saving to a taxpayer resulting from the deductions that he is allowed under sections 82B and 82D of the Principal Act in respect of dependants is less than two-fifths of the amount of those deductions, there is to be allowed a rebate of tax to bring the overall tax saving, from the dependants deductions and the proposed rebate, up to two-fifths (40 per cent) of the amount of those deductions. By reason of section 160AD of the Principal Act the proposed rebate cannot exceed the amount of tax otherwise payable.

The maximum deductions authorised for dependants under sections 82B and 82D are -

•

spouse, daughter-housekeeper, housekeeper, parent, parent-in-law - $364;

•

student (16 to 25), one child under 16, invalid relative - $260;

•

each other child under 16 - $208.

Sub-section (2) of the new section specifies the method of determining the tax saving to the taxpayer from the allowance of the dependants deductions. The tax saving is the difference between the tax ascertained by applying the general rates of tax (Schedule 1 to the Income Tax Bill 1974) to the taxpayer's taxable income and the tax ascertained by applying the general rates of tax to the amount that would have been the taxable income if there had been no deductions for maintenance of dependants.

By sub-clause (2) new section 160AA of the Principal Act will apply in assessments in respect of income of the 1974-75 and subsequent income years.

Clause 36: Rebate for export market development expenditure.

The amendment proposed by clause 36 is another consequential upon the proposed surcharge on property income. The clause will amend section 160AC of the Principal Act which provides for a rebate of tax of 42.5 cents for each dollar of eligible export market development expenditure, subject to the total tax saving from the rebate and any deduction allowable to the taxpayer in respect of the expenditure not exceeding 87.5 cents for each dollar of the expenditure.

The surcharge of tax on property income is to be based on the tax otherwise payable after the allowance of rebates of tax, including the rebate under section 160AC, and the proposed amendment to section 160AC will ensure that the surcharge is not taken into account in calculating the tax saving (see also notes on clauses 10 and 34).

Sub-clause (1) will amend the definition of "tax payable" or "tax" in section 160AC to the effect that any amount of surcharge payable by a taxpayer in respect of income from property will not be taken into account in calculating a tax saving for the purposes of section 160AC.

Sub-clause (2) provides for the amendment made by sub-clause (1) to apply in respect of income of the 1974-75 and subsequent income years.

Clauses 37 and 38: Credits in respect of tax paid in Papua New Guinea.

Introductory Note

Division 18 of the Principal Act provides for the allowance of a credit, against the Australian tax payable by a resident of Australia on income derived from sources in Papua New Guinea, in respect of the Papua New Guinea tax on the income. Clauses 37 and 38 propose a number of amendments to these credit provisions consequential upon the imposition by Papua New Guinea of a dividend withholding tax as from 29 August 1972 and the proposed imposition of a surcharge of tax on property income by the Income Tax Bill 1974.

Before it introduced a dividend withholding tax, Papua New Guinea taxed dividends paid to residents of Australia only to the extent to which they were paid out of Papua New Guinea profits. Credit was allowed under Division 18 on the same basis. The dividend withholding tax is now imposed on dividends paid by Papua New Guinea companies whatever the source of the profits out of which they are paid and, if Division 18 were not amended, credit could not be allowed against Australian tax for the Papua New Guinea tax on dividends paid out of profits with a source outside Papua New Guinea.

At the same time as it introduced the dividend withholding tax, Papua New Guinea discontinued a rebate which had effectively freed from Papua New Guinea tax dividends paid to companies resident in Australia. The credit provisions of Division 18 were based on the freedom from Papua New Guinea tax resulting from this rebate and, while appropriate in a situation where the dividends were tax-free in both Papua New Guinea and Australia, they operate unsatisfactorily in the context of a Papua New Guinea Tax on the dividends. If Division 18 were not amended, credit could be allowed (in some cases only) to an Australian company for the Papua New Guinea withholding tax on dividends it derives from Papua New Guinea even though, because of the rebate of tax on inter-corporate dividends under section 46, no Australian tax would be payable on them.

Clauses 37 and 38 will ensure that credit will be allowed for Papua New Guinea dividend withholding tax regardless of the source of the profits out of which the dividends were paid and that the credit allowed for the Papua New Guinea tax on dividends cannot exceed the Australian tax payable on them. The clauses will also ensure that credit for Papua New Guinea tax may be allowed against the proposed surcharge of tax on property income, in cases where it applies to income derived from Papua New Guinea.

Clause 37: Interpretation

This clause will amend a number of definitions contained in section 160AE of the Principal Act

By paragraph (a) of sub-clause (1) it is proposed to insert a definition of "dividend" in sub-section 160AE(1). "Dividend" will be defined to include a part of a dividend, to make it clear that credit may be allowed for Papua New Guinea tax on a part of a dividend that is included in the assessable income of a resident of Australia.

Paragraph (a) also proposes the omission of the present definition of "the adjusted net Territory income" in sub-section 160AE(1) and the insertion of a new definition of this term. The amount obtained from the application of this definition is used in ascertaining the amount of Australian tax payable in respect of income from Papua New Guinea sources, to which the credit for Papua New Guinea tax is limited.

The adjusted net Territory income is, in broad effect, the amount of taxable income derived from Papua New Guinea and is now ascertained by setting-off against the net Territory income (gross income less expenses of deriving it) a proportion of the apportionable deductions (certain deductions of a concessional nature) allowed in the taxpayer's assessment.

To understand the changes being made to the definition of "the adjusted net Territory income" it is necessary to take into account the proposed sub-section 160AF(6) being inserted by clause 38. Sub-section 160AF(6) is addressed to cases in which the taxpayer has both dividend income and other income from Papua New Guinea. The provision requires separate calculations of the credit for Papua New Guinea tax in respect of dividends and the credit in respect of other income. A case in which sub-section 160AF(6) applies is thus one in which the taxpayer has both dividends and other income from Papua New Guinea. Sub-section 160AF(6) does not apply where the taxpayer has dividends, but not other income, from Papua New Guinea, and vice versa.

Paragraph (a) of the new definition will apply where proposed sub-section 160AF(6) does not apply and the net Territory income exceeds the sum of the taxpayer's taxable income of the year of income and the apportionable deductions, for example, where the expenses of deriving income from sources within Australia exceed that income. In these circumstances the adjusted net Territory income will be regarded as equal to the taxable income.

Paragraph (b) of the definition applies where sub-section 160AF(6) applies and the combined net Territory income - in respect of dividends and in respect of other income - exceeds the sum of the taxpayer's taxable income and the apportionable deductions. In these circumstances the principle of paragraph (a) is followed and the taxable income is divided proportionately into the adjusted net Territory income from dividends and the adjusted net Territory income from income other than dividends.

Paragraph (c) of the definition of "the adjusted net Territory income" applies where the net Territory income does not exceed the sum of the taxpayer's taxable income and the apportionable deductions. In these cases a proportion of the apportionable deductions, equal to the proportion that the net Territory income bears to the sum of the taxable income and the apportionable deductions, is set-off against the net Territory income. In a case where section 160AF(6) applies this would be done separately in relation to dividends and to other income.

Paragraph (b) of sub-clause (1) proposes the omission of the present paragraphs (a) and (b) of the definition of "the average rate of Australian tax" in sub-section 160AE(1) and their replacement with new paragraphs (a) and (b), which in corporate drafting changes necessitated by other measures proposed in this Bill and the Income Tax Bill 1974.

The new paragraph (a) of the definition will ensure that the rebate of tax that is proposed to be allowed under section 160AA in cases where a taxpayer's "tax saving" from dependants deductions is less than 40 per cent of those deductions - see notes on clause 35 above - is taken into account in calculating, for tax credit purposes, a taxpayer's average rate of tax. The average rate is relevant in the ascertainment of the Australian tax payable on Papua New Guinea income.

The new paragraph (b) of the definition is designed to ensure that the surcharge of tax on property income (proposed in the Income Tax Bill) will not be taken into account in arriving at the average rate of Australian tax payable by a taxpayer. The definition is drafted to relate the tax payable to the whole of the taxable income and, as the proposed surcharge is to be imposed only on property income, it would be inappropriate to average it out over total taxable income. Proposed amendments to section 160AF (see notes relating to paragraph (1)(a) of clause 38) are, however, designed to take the surcharge of tax on property income into account in an appropriate way for credit purposes where the taxpayer has property income from Papua New Guinea.

Paragraph (c) of sub-clause (1) proposes to replace sub-section 160AE(3). That sub-section operates to allow a credit for Papua New Guinea tax in respect of dividends only to the extent that the dividends are paid out of profits derived from sources in Papua New Guinea. New sub-section (3) will qualify this rule by providing that credit may be allowed for Papua New Guinea withholding tax on dividends paid by Papua New Guinea companies regardless of the source of the profits from which the dividends are paid. The Papua New Guinea withholding tax applies to dividends paid by resident companies on or after 29 August 1972 and is imposed regardless of the source of the profits used to service the dividends. Papua New Guinea continues to tax certain dividends paid by companies not resident in Papua New Guinea, to the extent that the dividends are paid out of Papua New Guinea profits and the revised sub-section 160AE(3) will continue to recognise that basis of taxation by Papua New Guinea.

Sub-clause (2) provides that the amendments in sub-clause (1) that are consequential on the introduction of Papua New Guinea withholding tax, that is, paragraphs (a) and (c), are to be first taken into account in determining credits in respect of Papua New Guinea tax on income of the 1972-73 year of income. This was the year of income in which Papua New Guinea's withholding tax was introduced.

Sub-clause (3) provides that amendments that flow from other measures proposed in this Bill and the Income Tax Bill, that is, paragraph (b), will be taken into account in determining credits in respect of Papua New Guinea tax on income of the year of income that commenced on 1 July 1974, and all subsequent years of income.

Clause 38: Credits in respect of tax paid in Papua New Guinea

This clause will amend section 160AF of the Principal Act, primarily so that the credit to be allowed in respect of Papua New Guinea tax on dividends will be calculated separately from the credit for Papua New Guinea tax on other income from Papua New Guinea. This will help to meet the objective that an Australian company is not allowed credit for Papua New Guinea tax on dividends in respect of which it does not pay tax in Australia. The clause will also provide that the Australian tax on Papua New Guinea income, to which the credit for Papua New Guinea tax is limited, will, to an appropriate extent, include the proposed surcharge of tax on property income.

Paragraph (a) of sub-clause (1) inserts in section 160AF two new sub-sections - sub-sections (2A) and (2B) - which will provide a basis for taking the proposed surcharge on property income into account in the calculations that are necessary to determine the amount of credit to be allowed for tax paid in Papua New Guinea. It is a feature of the credit arrangements that credit is not to exceed the amount of Australian tax on the income from Papua New Guinea.

New sub-section 160AF(2A) sets out the basis on which the Australian tax on Papua New Guinea income is to be calculated in cases where the taxpayer's taxable income includes income from property (paragraph (a)) and a surcharge of tax is payable in respect of that property income (paragraph (b)). Paragraph (a) uses the term "property component" to describe the person's taxable income from property.

The amount of Australian tax payable in respect of Papua New Guinea property income is to be the amount calculated under the preceding provisions of section 160AF (paragraph (c)), that is, the amount that would, in the absence of the proposed surcharge on property income, be the amount of Australian tax payable, plus the part of the property income surcharge that represents the surcharge payable in respect of the Territory income (paragraph (d)).

Sub-paragraph (d)(i) provides that, where sub-section (6) of section 160AF of the Principal Act does not apply, that is, where the person's Papua New Guinea income consists solely of dividends or solely of income other than dividends, the part of the surcharge that is to be taken as being the part applicable to the Territory income is to be the same proportion of the total surcharge in respect of property income as the Territory property component bears to the taxpayer's total taxable income from property.

Where sub-section (6) of section 160AF does apply, that is, where the Papua New Guinea income consists of dividends and income other than dividends, sub-paragraph (d)(ii) provides that the part of the surcharge that is applicable to each part of the Territory income is to be calculated by first determining the amount that would be calculated in accordance with sub-paragraph (d)(i) in respect of the total Papua New Guinea property income. That amount is then to be apportioned between the Papua New Guinea dividend income and the Papua New Guinea property income (other than dividends). This basis of calculating the amount of the surcharge applicable to Papua New Guinea income is necessary to ensure that the total amount allocated to Papua New Guinea income does not exceed the total amount of surcharge payable.

New sub-section 160AF(2B) defines for purposes of sub-section (2A) the term 'the Territory property component'. This term is to mean the amount of the Territory property income included in the person's assessable income, less the sum of the deductions that relate exclusively to that income and so much of other deductions as may appropriately be related to it.

Paragraph (b) of sub-clause (1) will omit sub-section 160AF(3) of the Principal Act and insert an amended sub-section (3) in its place. The sub-section relates to dividends received by Australian companies from Papua New Guinea and, in the light of the freedom from Australian tax conferred on those dividends by sections 46 and 46A of the Principal Act, provides for their exclusion from the "adjusted net Territory income" of the companies. This exclusion, along with other provisions of Division 18, reflects the policy that a credit is to be allowed only where income bears Australian tax. Although the language of the revised sub-section 160AE(3) varies little from the existing provision, the revised provision, when read with the amendments proposed by paragraph (c) of sub-clause 38(1), will operate to re-inforce this policy in the situation that exists following the introduction by Papua New Guinea of a dividend withholding tax.

Paragraph (c) of sub-clause (1) will omit the present sub-section (5) of section 160AF of the Principal Act and insert an amended sub-section (5) and a new sub-section (6).

The proposed sub-section 160AF(5), which is similar in effect to the previous sub-section (5), will apply in somewhat unusual cases where it is impracticable to determine by a formula the amount of Australian tax applicable to Papua New Guinea income. The proposed amendment will include among the cases to which the sub-section applies the case in which a private company's taxable income includes private company dividends in respect of which the company is not allowed a full rebate under section 46 or 46A of the Principal Act. But for this amendment, sub-section 160AF(3) would have the effect of denying credit for Papua New Guinea tax in such a case. Sub-section (5) authorises the Commissioner of Taxation to determine the amount of the Australian tax that is reasonably attributable to Papua New Guinea income in this and the other unusual cases to which it applies.

The proposed new sub-section 160AF(6) when read in conjunction with other provisions, particularly sub-section 160AF(3), will have the principal effect that Papua New Guinea tax on dividends, to the extent that it exceeds the Australian tax applicable to those dividends - for example, where the dividends are derived by an Australian company and are effectively freed from tax by the rebate under section 46 - cannot be credited against Australian tax on other Papua New Guinea income.

Although existing sub-section 160AF(3) has the effect that the amount of Australian tax on Papua New Guinea income of an Australian company does not include any amount in respect of Papua New Guinea dividends, the Papua New Guinea tax on dividends is included in the amount of Papua New Guinea tax eligible for credit. If the company's only income from Papua New Guinea is dividends the result is that credit is not allowed, but in cases where the company has both dividends and other income the allowance under existing law of one credit for Papua New Guinea tax means that credit may be allowed for Papua New Guinea tax on dividends. The credit would be allowed in these circumstances even though there is no Australian tax payable on the dividends, and it would effectively reduce the Australian tax collected in respect of the other income from Papua New Guinea.

To avoid this result, sub-section 160AF(6) provides that where the Papua New Guinea income includes dividends and income other than dividends, the amount of Australian tax and the credit for Papua New Guinea tax are to be calculated separately for dividends and for other income, the credit for Papua New Guinea tax in each case not to exceed the amount of Australian tax. The result will be that an Australian company will not receive credit for Papua New Guinea tax on dividends that do not bear tax in Australia.

Sub-clause (2) provides that the amendments in paragraph (a) of sub-clause (1), that is, those consequent on the introduction of the property income surcharge, are to be taken into account in determining credits in respect of Papua New Guinea income for the year of income that commenced on 1 July 1974, and all subsequent years of income.

Sub-clause (3) provides that the amendments in paragraphs (b) and (c) of sub-clause (1), relating to the introduction of dividend withholding tax by Papua New Guinea, apply in the determination of credits in respect of Papua New Guinea income for the year of income during which Papua New Guinea dividend withholding tax was introduced - 1972-73 - and all subsequent years of income.

Clause 39: Amendment of assessments.

This clause will amend section 170 of the Principal Act which governs the power of the Commissioner of Taxation to amend income tax assessments. Sub-section (10) of section 170 provides that nothing in the section is to prevent the amendment of an assessment at any time for the purpose of giving effect to specified provisions of the Principal Act.

By this clause it is proposed to insert in sub-section 170(10) references to proposed new provisions 122T, 123A(2) and (3), and 124AQ which operate to exclude from the respective classes of capital expenditure that otherwise qualify for special deductions under Divisions 10, 10AAA and 10AA respectively amounts of expenditure for which a taxpayer has been, is entitled to be, or becomes entitled to be, recouped. As amended, sub-section 170(10) will provide the necessary authority for the Commissioner to amend assessments where, after the relevant deductions have been allowed, a taxpayer becomes entitled to recoupment of expenditure.

The clause will also substitute a reference to sub section 124DE(2) of the Principal Act contained in the present Division 10AA by a reference to the corresponding provision in the proposed new Division 10AA - sub-section 124AB(3).

Clause 40: Amount of provisional tax.

This clause, which is associated with the surcharge on property income, will amend paragraph 221YC(1)(b) of the Principal Act, which applies where a taxpayer commenced, during the year prior to the year for which provisional tax is being determined, to derive income from any source. In such cases the provisional income for provisional tax purposes is the amount which the Commissioner estimates would have been the taxpayer's taxable income for the previous year if income had commenced to be derived from the source at the beginning of that year. Paragraph 221YC(1)(b) provides that in such a case the amount of provisional tax payable by the taxpayer is to be an amount equivalent to the income tax which would be payable in respect of the taxable income of the preceding year of income if that taxable income had been equal in amount to the provisional income. In conjunction with section 221YA the practical effect of this paragraph is that where a taxpayer commences to derive income during a year of income the amount of provisional tax for the following year is calculated by reference to the income of the year of income adjusted to a full year equivalent.

Sub-clause (1) will amend paragraph (b) of sub-section 221YC(1) to authorise the Commissioner, in the application of that sub-section, to determine the extent, if any, to which the provisional income is derived from income from property. This amendment is necessary in consequence of the introduction of the property income surcharge proposed by the Income Tax Bill 1974, in order that the amount of provisional tax payable in cases to which the paragraph applies may be properly determined where the taxpayer is in receipt of property income.

By sub-clause (2), the amendment made by sub-clause (1) will apply to provisional tax calculated in respect of income of the year of income that commenced on 1 July 1974 and in respect of income of all subsequent years of income.

Clause 41: Provisional tax on estimated income.

This clause proposes an amendment of section 221YDA of the Assessment Act which relates to provisional tax payable in cases where the taxpayer applies to have provisional tax for a year of income varied. In such cases the taxpayer is required by sub-section (1) of that section to submit to the Commissioner of Taxation an estimate of the amount of taxable income for the year of income, the respective amounts of salary or wages and other income included in the estimated taxable income and the amount of tax instalments that are estimated will be made from earnings in the year. Except where the Commissioner has reason to believe that the estimated amounts are too low, the amount of tax calculated on the basis of these estimates is substituted for the provisional tax originally notified as payable by the taxpayer for that year.

It is proposed by paragraph (a) of sub-clause (1) to omit the existing paragraph 221YDA(1)(d) and insert two new paragraphs - paragraphs (d) and (da). New paragraph (d) is largely a re-statement of existing paragraph (d) except that a taxpayer seeking a variation of provisional tax will be required to provide the Commissioner with an estimate of taxable income from property as well as of salary or wage income.

So that the proposed rebate of tax in respect of deductions for dependants under new section 160AA - see notes on clause 35 - may be taken into account in recalculating provisional tax, new paragraph (da) will require to be included in an application for a variation of provisional tax an estimate of the amount of dependants deductions to be claimed by the taxpayer.

Paragraph (b) of sub-clause (1) omits paragraph 221YDA(2)(a) and inserts an amended paragraph (a) in its place. Paragraph 221YDA(2)(a) relates to the calculation of provisional tax in cases where the taxpayer has provided an estimate of taxable income in accordance with sub-section 221YDA(1). Consequent upon the proposed imposition of a surcharge of tax on property income by the Income Tax Bill 1974, the new paragraph (a) provides - in sub-paragraph (i) - for the amount estimated by the taxpayer as taxable income from property to be taken into account so that the provisional tax recalculated under paragraph (a) may include the appropriate amount of surcharge in respect of property income. Sub-paragraph (ii) provides for the dependants deductions estimated by the taxpayer to be taken into account so that any rebate in respect of those deductions under new section 160AA - see notes on clause 35 - may be reflected in the recalculation of the provisional tax payable.

Turning to paragraph (c) of sub-clause 41(1), where the Commissioner of Taxation has reason to believe that the taxpayer's taxable income will be greater than the amount estimated, sub-section 221YDA(4) authorises the Commissioner to substitute his estimates of the taxpayer's taxable income and the other items estimated by the taxpayer in the application for variation of provision tax, and to recalculate the provisional tax on the basis of these amounts. However, sub-section 221YDA(5) applies to limit the amounts the Commissioner may estimate as the taxpayer's estimated taxable income, salary or wages and other income to the respective amounts derived by the taxpayer in the previous year.

Since, in consequence of the proposed imposition of a surcharge of tax on property income, the amount of provisional tax will be affected by the amount of property income included in the provisional income, paragraph (c) of sub-clause 41(1) will omit sub-section 221YDA(5) and insert an amended sub-section (5) which will provide that the amount estimated by the Commissioner as the taxpayer's property income shall not exceed the taxpayer's property income for the preceding year.

By sub-clause (2) of clause 41, the amendments made by sub-clause (1) will apply to provisional tax in respect of the 1974-75 income year and subsequent income years.

Clause 42: Penalty where income under-estimated.

This clause will amend section 221YDB of the Principal Act which provides for the imposition of a penalty where, at the taxpayer's request, provisional tax has been varied (see notes to clause 41) and the taxpayer's estimate of taxable income for that purpose falls short of four-fifths of both the current year's taxable income as subsequently assessed and the previous year's taxable income. The amount of the penalty is one-tenth of the difference between the provisional tax payable on the estimated taxable income and the income tax that would be payable on the lesser of a taxable income equal to four-fifths of the taxpayer's current year taxable income and a taxable income equal to four-fifths of taxable income of the previous year. In consequence of the proposed imposition of a surcharge of tax on property income, it is necessary for the surcharge to be taken into account in calculating any penalty under this section.

Sub-clause (1) of clause 42 will omit paragraphs (a) and (b) of sub-section 221YDB(1) and insert amended paragraphs (a) and (b) in their place. New paragraph (a) will provide that, in calculating the tax payable on four-fifths of the taxpayer's taxable income for the current year for the purposes of paragraph 221YDB(1)(a), four-fifths of the amount of property income included in that taxable income is to be taken into account. New paragraph (b) incorporates corresponding amendments in relation to the calculation of the tax payable on four-fifths of the taxpayer's taxable income for the previous year for the purposes of section 221YDB.

Sub-clause (2) provides that the amendment made by sub-clause (1) will apply in respect of provisional tax for the 1974-75 and subsequent years.

Clause 43: Release of taxpayers in cases of hardship.

This clause will amend section 265 of the Principal Act which empowers the Board constituted under the section to release a taxpayer from the whole or part of his liability for income tax.

Under sub-section (3) of section 265 the Board (usually referred to as the Relief Board) is required to refer each application for release from payment of tax of $1,000 or more to a member of a Board of Review or the Chairman of a Valuation Board who may examine the applicant concerning any statement the applicant desires to place before the Relief Board. Where release is sought from payment of less than $1,000 the Board may, at its discretion, refer the application to a member of a Board of Review or the Chairman of a Valuation Board.

Under paragraph (a) of clause 43 sub-section (3) of section 265 is to be amended to increase this amount to $2,000 so that the Relief Board will in future be able to determine applications up to this amount without first having referred them to a member of a Board of Review or the Chairman of a Valuation Board.

Under sub-section (11) of section 265 the Commissioner may exercise the powers conferred on the Relief Board where application is made for release from a liability of $100 or less. Under paragraph (b) of clause 43, sub-section (11) is to be amended to increase this figure to $200.

Clause 44: Transitional provision in relation to partial exemption of income from certain mining operations.

This clause will insert a transitional provision of a technical nature in the Bill. The provision is a consequence of the repeal of section 23A (by clause 5), which at present applies to exempt part of the net income derived from mining for prescribed metals or minerals in Australia or Papua New Guinea, and the complementary amendment proposed to section 122G (by clause 27). It has effect in relation to an enterprise mining for prescribed minerals which has elected to claim a deduction in a year of income for amounts appropriated out of income of that year which it intends to expend on allowable capital expenditure in the following year.

The amendment proposed by clause 44 will, in broad terms, ensure that where -

(a)

a deduction for an appropriation of income has been allowed in the 1973-74 income year against income that was partially exempt under section 23A; and

(b)

the amount so deducted is required by the operation of section 122G(4) to be included in assessable income in 1974-75 to offset deductions allowable for the actual expenditure of the appropriated amount,

the whole or an appropriate part of the amount to be so included will continue to be treated as income to which section 23A applies. Without this adjustment, an enterprise which derived assessable income from the sale of a prescribed metal or mineral could effectively be deprived of some of the exemption attributable to income derived in 1973-74, the last year for which the partial exemption will be available.

Clause 45: Transitional provision in relation to purchase of prospecting or mining rights or information.

This clause proposes a transitional provision of a technical nature consequent on the proposed repeal of Division 10AA of the Principal Act and its replacement by a new Division 10AA (clause 33).

As mentioned in the notes on clause 33, proposed new section 124AB will vary the basis on which deductions are allowable in the future for capital expenditure incurred in acquiring a petroleum prospecting or mining right or petroleum prospecting or mining information. Under the present section 124DE these deductions are available immediately against petroleum mining income whereas, under section 124AB(1) the expenditures are to be deductible over the life of the petroleum field.

Clause 45 provides for cases where, before the new provisions come into force, notices are duly given under section 124DE in relation to the acquisition of a petroleum prospecting or mining right or information. In these cases the transitional provision will have effect so as to treat notices given under the former provisions as if they had been duly given under sub-section (1) or (2) of section 124AB, as appropriate.

Clause 46: Calculation of provisional tax for year of income that commenced on 1 July 1974.

This clause, which will not amend the Principal Act will vary the operation of section 221YC of that Act which fixes the amount of provisional tax payable by an individual taxpayer in respect of income other than salary or wages. If there is no change in tax rates the provisional tax for a year of income is normally based on the amount of tax assessed for the preceding year of income. Section 221YC of the Principal Act is to this effect. As tax will be assessed on 1974-75 income at the new rates of tax, including the property income surcharge, proposed in the Income Tax Bill 1974, clause 46 will vary the operation of section 221YC to provide that the proposed new rates of tax and the property income surcharge are to be taken into account in the calculation of the amount of provisional tax payable by a taxpayer in respect of income of the 1974-75 income year.

Paragraph (a) of sub-section 221YC(1) applies where the taxpayer derived a full year's income from business or property sources in the year preceding that for which the provisional tax is payable. In such cases, the provisional tax payable for the current year is normally an amount equal to the tax assessed for the preceding year.

Paragraph (b) of sub-section 221YC(1) applies where the income of the preceding year was not a full year's income. In these cases the provisional tax payable for the current year is based on the income of the preceding year, adjusted to a full year basis.

Clause 46 will have the effect of making paragraphs (a) and (b) of sub-section 221YC(1) apply as they would have applied if the Income Tax Bill 1974 and paragraph 3(1)(c) of this Bill - see notes on that Bill and that clause - had been in force for the 1973-74 income year.

Where paragraph 221YC(1)(a) applies, paragraph (a) of this clause will provide that the provisional tax in respect of income of the 1974-75 income year will be calculated by applying to the 1973-74 taxable income the new rates of income tax proposed for the 1974-75 income year by the Income Tax Bill 1974, including the rates of the proposed surcharge on property income. For this purpose, the amended definition of "income from personal exertion" proposed by clause 3(1)(c) will be applied.

Paragraph (b) of clause 46 will apply in cases where paragraph 221YC(1)(b) applies, to provide that the provisional tax for 1974-75 will be calculated by applying to a taxable income equal to the provisional income estimated by the Commissioner, and including property income to the extent determined by him on the basis of the amended definition of income from personal exertion, the new rates proposed for the 1974-75 income year, including the proposed surcharge of tax on property income.

INCOME TAX (BEARER DEBENTURES) BILL 1974

The purpose of this Bill is to alter the basic rate of tax payable under section 126 of the Assessment Act on interest paid by a company on bearer debentures where the names and addresses of the holders of the debentures are not disclosed by the company concerned to the Commissioner of Taxation.

The following notes relate to the individual clauses of the Bill.

Clauses 1 and 2

Clauses 1 and 2 are formal provisions. Like the corresponding provisions in the Income Tax Bill 1974 and the Income Tax Assessment Bill (No. 2) 1974, clause 2 of this Bill will bring the proposed Act into operation on the day on which it receives the Royal Assent.

Clause 3: Rate of tax.

This clause proposes that paragraphs (a) and (b) of section 6 of the Income Tax (Bearer Debentures) Act, which declare the rates of tax for the purposes of section 126 of the Assessment Act, be omitted and new paragraphs (a) and (b) inserted in their place.

The proposed new paragraph (a) of section 6 is the same as the paragraph which it replaces except that, as a drafting measure, the word "ten" has been replaced by the figures "10". Paragraph (a) applies to bearer debentures issued abroad in respect of foreign currency loans.

Paragraph (b) will apply in relation to interest subject to tax under section 126 of the Assessment Act to which paragraph (a) does not apply. At present, the rate of tax applicable in these cases is the rate that would be applicable to a taxable income of $16,786 which, at the existing general rates of tax, is 38.78619 per centum and this rate will continue to apply, in accordance with sub-paragraph (i), to interest paid or credited before the date of commencement of this amending Act. For interest paid or credited on or after that date, sub-paragraph (ii) declares a rate of tax of 55 per centum. This will bring the rate in these cases into line with the rate, including the proposed surcharge of tax on property income, which will be payable in respect of property income under the Income Tax Bill 1974 in the case of other "anti-avoidance" provisions - sections 94 and 99A of the Assessment Act.